ING USA ANNUITY & LIFE INSURANCE CO – 10-K – Management’s Narrative Analysis of the Results of Operations and Financial Condition

              indirectly for substantially the full term of the asset or 

liability.

              Level 2 inputs include the following:              (a)     Quoted prices for similar assets or liabilities in active                      markets;              (b)     Quoted prices for identical or similar assets or liabilities in                      non-active markets;              (c)     Inputs other than quoted market prices that are observable; and              (d)     Inputs that are derived principally from or corroborated by                      observable market data through correlation or other means.                                            53 

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   †            Level 3 - Prices or valuation techniques that require inputs that              are both unobservable and significant to the overall fair value              measurement.  These valuations, whether derived internally or              obtained from a third party, use critical assumptions that are not              widely available to estimate market participant expectations in              valuing the asset or liability.     When available, the estimated fair value of securities is based on quoted prices in active markets that are readily and regularly obtainable. When quoted prices in active markets are not available, the determination of estimated fair value is based on market standard valuation methodologies, including discounted cash flow methodologies, matrix pricing, or other similar techniques. For more information regarding the Company's process of assigning fair values to investments, refer to the Financial Instruments note to the Financial Statements.    Derivatives    The Company enters into interest rate, equity market, credit default, and currency contracts, including swaps, futures, forwards, caps, floors, and options, to reduce and manage various risks associated with changes in value, yield, price, cash flow, or exchange rates of assets or liabilities held or intended to be held, or to assume or reduce credit exposure associated with a referenced asset, index, or pool. The Company also utilizes options and futures on equity indices to reduce and manage risks associated with its annuity products.    Derivatives are carried at fair value, which is determined using observable key financial data from third-party sources, such as yield curves, exchange rates, S&P 500 Index prices, and London Interbank Offered Rates ("LIBOR"), or through values established by third-party brokers. Counterparty credit risk is considered and incorporated in the Company's valuation process through counterparty credit rating requirements and monitoring of overall exposure. The Company's credit risk is also considered and incorporated in its valuation process.    The Company also has certain credit default swaps and options that are priced using models that primarily use market observable inputs, but contain inputs that are not observable to market participants.    The Company also has investments in certain fixed maturities, and has issued certain annuity products, that contain embedded derivatives whose fair value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short-term or long-term), exchange rates, prepayment rates, equity markets, or credit ratings/spreads.    The fair values of these embedded derivatives are determined using prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These valuations, whether derived internally or obtained from a third-party, use critical assumptions that are not widely available to estimate market participant expectations in valuing the asset or liability. For additional information regarding the valuation of and significant assumptions                                           54 

--------------------------------------------------------------------------------    associated with embedded derivatives associated with variable annuity contracts offering GMAB and GMWB features and certain fixed indexed annuity contracts, refer to the "Reserves for Future Policy Benefits" section.    In addition, the Company has entered into a coinsurance with funds withheld arrangement that contains an embedded derivative whose fair value is based on the change in the fair value of the underlying assets held in trust.  The fair values of the underlying assets held in the trust are determined using the valuation methods and assumptions described for the Company's investments held.    

For additional information regarding the fair value measurements associated with derivatives, refer to the Financial Instruments note to the Financial Statements.

    Impairments    The Company periodically evaluates its available-for-sale general account investments to determine whether there has been an other-than-temporary decline in fair value below the amortized cost basis. Factors considered in this analysis include, but are not limited to, the length of time and the extent to which the fair value has been less than amortized cost, the issuer's financial condition and near-term prospects, future economic conditions and market forecasts, interest rate changes, and changes in ratings of the security.  An extended and severe unrealized loss position on a fixed maturity may not have any impact on: (a) the ability of the issuer to service all schedule interest and principal payment, and (b) the evaluation of recoverability of all contractual cash flows or the ability to recover an amount at least equal to its amortized cost based on the present value of the expected future cash flows to be collected.  In contrast, for certain equity securities, the Company gives greater weight and consideration to a decline in market value and the likelihood such market value decline will recover.    Effective April 1, 2009, the Company prospectively adopted guidance on the recognition and presentation of other-than-temporary impairment ("OTTI") losses.  When assessing the Company's intent to sell a security or if it is more likely than not it will be required to sell a security before recovery of its amortized cost basis, the Company evaluates facts and circumstances such as, but not limited to, decisions to rebalance the investment portfolio and sales of investments to meet cash flow needs or capital needs.    When the Company has determined that it has the intent to sell or if it is more likely than not that the Company will be required to sell a security before recovery of its amortized cost basis and the fair value has declined below amortized cost ("intent impairment"), the individual security is written down from amortized cost to fair value, and a corresponding charge is recorded in Net realized capital gains (losses) in the Statements of Operations as an OTTI. 

If

 the Company does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security before recovery of its amortized cost basis, but the Company has determined that there has been an other-than-temporary decline in fair value below the amortized cost basis, the OTTI is bifurcated into the amount representing the                                           55  --------------------------------------------------------------------------------    present value of the decrease in cash flows expected to be collected ("credit impairment") and the amount related to other factors ("noncredit impairment"). The credit impairment is recorded in Net realized capital gains (losses) in the Statements of Operations.  The noncredit impairment is recorded in Other comprehensive income (loss) on the Balance Sheets.    Prior to April 1, 2009, the Company recognized in earnings an OTTI for a fixed maturity in an unrealized loss position, unless the Company could assert that it had both the intent and ability to hold the fixed maturity for a period of time sufficient to allow for a recovery of estimated fair value to the security's amortized cost. The entire difference between the fixed maturity's amortized cost basis and its estimated fair value was recognized in earnings if the security was determined to have an OTTI.    There was no change in guidance for equity securities which, when an OTTI has occurred, continue to be impaired for the entire difference between the equity security's cost and its estimated fair value.    

The Company uses the following methodology and significant inputs to determine the amount of the OTTI credit loss:

   †            The Company calculates the recovery value by performing a discounted              cash flow analysis based on the present value of future cash flows              expected to be received.  The discount rate is generally the              effective interest rate of the fixed maturity prior to impairment. †            When determining collectability and the period over which the value              is expected to recover, the Company applies the same

considerations

             utilized in its overall impairment evaluation process, which              incorporates information regarding the specific security, the              industry and geographic area in which the issuer operates, and              overall macroeconomic conditions. Projected future cash flows are              estimated using assumptions derived from the Company's best              estimates of likely scenario-based outcomes, after giving              consideration to a variety of variables that include, but is not              limited to: general payment terms of the security; the

likelihood

             that the issuer can service the scheduled interest and

principal

              payments; the quality and amount of any credit enhancements; 

the

             security's position within the capital structure of the

issuer;

             possible corporate restructurings or asset sales by the

issuer; and

             changes to the rating of the security or the issuer by rating              agencies. Additional considerations are made when assessing the              unique features that apply to certain structured securities, such as              Residential Mortgage-backed Securities ("RMBS"), Commercial              Mortgage-backed Securities ("CMBS"), and Asset-backed

Securities

             ("ABS").  These additional factors for structured securities              include, but are not limited to: the quality of underlying              collateral; expected prepayment speeds; current and forecasted loss              severity; and the payment priority within the tranche

structure of

             the security. †            When determining the amount of the credit loss for U.S. and foreign              corporate securities, foreign government securities and state and              political subdivision securities, the Company considers the              estimated fair value as the recovery value when available              information does not indicate that another value is more                                            56 

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                appropriate. When information is identified that indicates a              recovery value other than estimated fair value, the Company              considers in the determination of recovery value the same              considerations utilized in its overall impairment evaluation              process, which incorporates available information and the Company's              best estimate of scenarios-based outcomes regarding the specific              security and issuer; possible corporate restructurings or asset              sales by the issuer; the quality and amount of any credit              enhancements; the security's position within the capital structure              of the issuer; fundamentals of the industry and geographic area in              which the security issuer operates, and the overall

macroeconomic              conditions.     The cost or amortized cost of fixed maturities and equity securities is adjusted for OTTI in the period in which the determination is made.  The Company does not change the revised cost basis for subsequent recoveries in value.    In periods subsequent to the recognition of the credit related impairment components of OTTI on a fixed maturity, the Company accounts for the impaired security as if it had been purchased on the measurement date of the impairment. Accordingly, the discount (or reduced premium) based on the new cost basis is accreted into net investment income over the remaining term of the fixed maturity in a prospective manner based on the amount and timing of estimated future cash flows.   

Mortgage Loans on Real Estate

    Mortgage loans on real estate are all commercial mortgage loans, which are reported at amortized cost, less impairment write-downs and allowance for losses. If the value of any mortgage loan is determined to be impaired (i.e., when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement), the carrying value of the mortgage loan is reduced to the lower of either the present value of expected cash flows from the loan, discounted at the loan's effective interest rate, or fair value of the collateral. For those mortgages that are determined to require foreclosure, the carrying value is reduced to the fair value of the underlying collateral, net of estimated costs to obtain and sell at the point of foreclosure. The carrying value of the impaired loans is reduced by establishing a permanent write-down recorded in Net realized capital gains (losses) in the Statements of Operations. In response to challenges that the economy presented to the commercial mortgage market, the Company began recording an allowance for probable incurred, but not specifically identified, losses related to factors inherent in the lending process beginning in the third quarter of 2009.    Income Taxes    The Company uses certain assumptions and estimates in determining the income taxes payable or refundable to/from the Parent for the current year, the deferred income tax liabilities and assets for items recognized differently in its financial statements from amounts shown on the Company's income tax returns, and the federal income tax expense. Determining these amounts requires analysis and interpretation of current tax laws and regulations, including the loss limitation rules                                           57 

--------------------------------------------------------------------------------      associated with change in control. The Company exercises considerable judgment in evaluating the amount and timing of recognition of the resulting income tax liabilities and assets. These judgments and estimates are reevaluated on a continual basis as regulatory and business factors change.    The results of the Company's operations are included in the consolidated tax return of ING AIH.  Generally, the Company's financial statements recognize the current and deferred income tax consequences that result from the Company's activities during the current and preceding periods pursuant to the provisions of Accounting Standards Codification Topic 740, Income Taxes (ASC 740) as if the Company were a separate taxpayer rather than a member of ING AIH's consolidated income tax return group with the exception of any net operating loss carryforwards and capital loss carryforwards, which are recorded pursuant to the tax sharing agreement.  The Company's tax sharing agreement with ING AIH states that for each taxable year during which the Company is included in a consolidated federal income tax return with ING AIH, ING AIH will pay to the Company an amount equal to the tax benefit of the Company's net operating loss carryforwards and capital loss carryforwards generated in such year, without regard to whether such net operating loss carryforwards and capital loss carryforwards are actually utilized in the reduction of the consolidated federal income tax liability for any consolidated taxable year.    The Company evaluates and tests the recoverability of deferred tax assets. Deferred tax assets represent the tax benefit of future deductible temporary differences and tax credit carryforwards.  Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Considerable judgment and the use of estimates are required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance, the Company considers many factors, including:    †            The nature and character of the deferred tax assets and liabilities; †            Taxable income in prior carryback years; †            Projected future taxable income, exclusive of reversing temporary              differences and carryforwards; †            Projected future reversals of existing temporary differences; †            The length of time carryforwards can be utilized; and †            Any prudent and feasible tax planning strategies the Company would              employ to avoid a tax benefit from expiring unused.    

As of December 31, 2011 and 2010, the Company recorded the following valuation allowances:

    ($ in millions, except as otherwise noted)             2011      2010 

Realized and unrealized capital loss on investments $ - $ 187.5 Foreign tax credits

                                    12.1      12.1     In establishing tax liabilities, the Company determines whether a tax position is more likely than not to be sustained under examination by the appropriate taxing authority.                                           58 

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Tax positions that do not meet the more likely than not standard are not recognized. Tax positions that meet this standard are recognized in the Financial Statements. The Company measures the tax position as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate resolution with a taxing authority that has full knowledge of all relevant information.

Certain changes or future events, such as changes in tax legislation, geographic mix of earnings and completion of tax audits, planning opportunities and expectations about future outcomes could have an impact on the Company's estimates and effective tax rate.

   Contingencies    A loss contingency is an existing condition, situation, or set of circumstances involving uncertainty as to possible loss that will ultimately be resolved when one or more future events occur or fail to occur. Examples of loss contingencies include pending or threatened adverse litigation, threat of expropriation of assets, and actual or possible claims and assessments. Amounts related to loss contingencies are accrued if it is probable that a loss has been incurred and the amount can be reasonably estimated.    Results of Operations    Overview   

Products currently offered by the Company include immediate and deferred fixed annuities, designed to address individual customer needs for tax-advantaged savings, retirement needs, and wealth-protection concerns, and guaranteed investment contracts and funding agreements (collectively referred to as "GICs"), sold primarily to institutional investors and corporate benefit plans.

    On April 9, 2009, ING USA's ultimate parent, ING, announced a global business strategy which identified certain core and non-core businesses and geographies, stated ING's intention to explore divestiture of non-core businesses over time, withdraw from certain non-core geographies, limit future acquisitions and implement enterprise-wide expense reductions.  In particular, with respect to ING's U.S. insurance operations, ING is seeking to further reduce its risk by focusing on individual life products, retirement services and a new suite of simpler, lower risk annuity products to be sold by ING USA's affiliate, ING Life Insurance and Annuity Company.  As part of this strategy, ING USA ceased new sales of variable annuity products in March of 2010. Some new amounts will continue to be deposited on ING USA variable annuities as add-on premiums to existing contracts.    The Company derives its revenue mainly from (a) fee income generated on variable assets under management ("AUM"), (b) investment income earned on fixed AUM, and (c) certain other management fees.  Fee income is primarily generated from separate account assets supporting variable options under variable annuity contract investments, as designated by contract owners.  Investment income from fixed AUM                                           59 

--------------------------------------------------------------------------------    is mainly generated from annuity products with fixed investment options and GIC deposits.  The Company's expenses primarily consist of (a) interest credited and other benefits to contract owners, (b) amortization of DAC and value of business acquired ("VOBA"), (c) expenses related to the selling and servicing of the various products offered by the Company, and (d) other general business expenses.    Economic Analysis    The pace of economic growth in the U.S. remained subdued in the second half of 2011, though the U.S. economy performed better than the first half of the year. The U.S. economy grew 1.8% on annualized basis in the third quarter of the year, while industrial production rose more than 2% in the second half of the year compared to just 0.6% in the first half of the year.  The pace of growth has stayed modest and below trend growth rates due to a variety of factors. Consumer spending has expanded tepidly because of the slow improvement in the labor market, the elevated unemployment rate, and the minor increase in real disposable income.  Business fixed investment is increasing less rapidly, while the housing sector is still depressed.  House prices have continued to decline and residential investment remains weak.  Real export growth has been disappointing.  Global industrial production and global trade are expanding but at a fairly modest pace because of the slowing in global growth.    Overall inflation was contained during 2011 with the exception of higher energy and commodity prices which received significant press coverage. The public's perception of inflation will depend on whether the effects of higher energy and other commodities price increases dissipate and stabilize in the coming year. The pace of economic growth is still constrained by high unemployment, modest income growth, lower housing wealth, and tepid expansion of credit.  The sustainability of the ongoing recovery still depends on supportive fiscal and monetary policies.    The Federal Reserve (the "Fed") has continued to extend the average maturity of the securities in its portfolio, announced in September 2011. The Fed intends to exert downward pressure on long-term rates. To that effect, it has announced that it will purchase, by mid-2012, nearly $400 billion of Treasury securities with remaining maturities of 6 years to 30 years, while selling the same amount of Treasury securities with remaining maturities of 3 years or less during the same period. The Fed will also reinvest principal payment for its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities to support conditions in the mortgage market. Furthermore, based on its assessment of current economic conditions, economic outlook and the balance of risks, the Fed is conditionally committed to keeping the federal funds target rate in the range of 0 to 25 basis points until mid-2013.    Short-term LIBOR remains low by historic standards but has been gradually rising since mid 2011. However, U.S. Treasury rates have declined noticeably since the beginning of 2011. Long-term U.S. Treasury rates decreased in the fourth quarter of                                           60 

--------------------------------------------------------------------------------    2011 as compared to the same period in 2010. The decline in U.S. Treasury rates is mainly due to the Fed's commitment to keep the federal funds target rate low until mid-2013, low short-term rates, its policy to exert downward pressure on long-term rates, and well-anchored inflationary expectations.    In spite of modest improvement in economic activity in the second half of 2011, and accommodative policies, risks to the U.S. economy continue to point to possible negative developments. Risks which could lead to negative developments include strains in global financial conditions; weakness in household financial conditions, which would lead to slower consumer spending; larger-than-expected near-term fiscal tightening, which would lower aggregate demand; financial and economic spillover from the euro zone's inability to contain the region's debt crisis; and crude oil prices spiking in the event of an escalation of conflict between the U.S. and Iran. These economic conditions and risks are not unique to the Company, but present challenges to the entire insurance and financial services industry.                                           61 

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Year ended December 31, 2011 compared to year ended December 31, 2010

    The Company's results of operations for the year ended December 31, 2011, and changes therein, were primarily impacted by a Net realized capital gain incurred in the current year versus a Net realized capital loss incurred in the prior year, lower Net amortization of DAC and VOBA, higher Premiums, and higher Net investment income. These favorable items were partially offset by an increase in Interest credited and other benefits to contract owners, lower Fee income, and an increase to Income tax expense.                                       Years Ended December 31,         $ Increase       % Increase                                      2011              2010         (Decrease)       (Decrease) Revenues: Net investment income             $    1,409.3       $ 1,356.4      $      52.9           3.9% Fee income                             1,079.4         1,091.3            (11.9 )       (1.1)% Premiums                                 456.2           280.6            175.6          62.6% Net realized capital gains (losses): Total other-than-temporary impairment losses                       (201.5 )        (300.1 )           98.6          32.9% Portion of other-than-temporary impairment losses recognized in Other comprehensive income             21.1           105.7            (84.6 )      (80.0)% Net other-than-temporary impairments recognized in earnings                                (180.4 )        (194.4 )           14.0           7.2% Other net realized capital gains (losses)                           922.5          (611.3 )        1,533.8             NM Total net realized capital gains (losses)                           742.1          (805.7 )        1,547.8             NM Other income                               0.7              -               0.7             NM Total revenue                          3,687.7         1,922.6          1,765.1          91.8% Benefits and expenses: Interest credited and other benefits to contract owners            3,044.9           985.0          2,059.9             NM Operating expenses                       437.1           428.4              8.7           2.0% Net amortization of deferred policy acquisition costs and value of business acquired              (236.5 )         411.6           (648.1 )           NM Interest expense                          31.7            32.1             (0.4 )       (1.2)% Other expense                             11.4            39.3            (27.9 )      (71.0)% Total benefits and expenses            3,288.6         1,896.4          1,392.2          73.4% Income before income taxes               399.1            26.2            372.9             NM Income tax expense (benefit)               1.1           (55.1 )           56.2             NM Net income                        $      398.0       $    81.3      $     316.7             NM Effective tax rate                         0.3 %       (210.3) % NM - Not meaningful.                                            62 

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     Revenues    Total revenue increased for the year ended December 31, 2011, primarily due to a favorable change in Net realized capital gains (losses), higher Premiums and Net investment income, partially offset by lower Fee income.    The increase in Total net realized capital gains for the year ended December 31, 2011 is primarily due to a low interest rate environment, as well as a decrease in equity market performance as compared to 2010, which had an impact on the Company's hedging programs. The increase can be attributed to a favorable change in derivatives related to (a) hedging of variable annuity guaranteed living benefits ("VAGLB") ceded to SLDI under the combined coinsurance and coinsurance funds withheld agreement, which commenced in the third quarter of 2009 (note that the gains on the VAGLB are ceded to SLDI and reported as a corresponding increase in Interest credited and other benefits to policyholders), and (b) hedging of variable annuity guaranteed death benefits. These gains were partially offset by unfavorable changes in (a) derivatives used to hedge risks associated with Fixed Indexed Annuity ("FIA") products, and (b) the hedging program designed to mitigate the impact of potential declines in equity markets and their impact to regulatory capital. Lower credit and intent related impairments on fixed maturities driven by a lower interest rate environment also contributed to this favorable variance.    

The increase in Net investment income for the year ended December 31, 2011 is primarily due to an increase in investment income within fixed maturity investments in corporate securities offset by a decline in CMBS investment income as positions were reduced and reinvested in investment grade ("IG") corporate securities.

The decrease in Fee income for the year ended December 31, 2011 reflects a decrease in average variable AUM.

    Premiums for the year ended December 31, 2011 increased due to a decrease in reinsurance ceded.  This decrease was driven primarily by a transaction in the fourth quarter of 2010 to cede business to SLDI.  As a result of this transaction, there was an initial reserve transfer which significantly increased the reinsurance ceded total for 2010.    Benefits and Expenses    Total benefits and expenses increased for the year ended December 31, 2011 primarily due to an increase in Interest credited and other benefits to contract owners.  This was partially offset by favorable Net amortization of DAC and VOBA and lower Other expenses.    The increase in Interest credited and other benefits to contract owners for the year ended December 31, 2011 reflects the transfer of gains (losses) on derivatives and investment income under the combined coinsurance and coinsurance funds withheld agreement with SLDI. The corresponding gains and investment income are reported in Total net realized capital gains (losses) and Net investment income, respectively. In                                           63  --------------------------------------------------------------------------------    addition, Interest credited and other benefits to contract owners reflects an unfavorable change in variable annuity guaranteed benefit reserves which was primarily driven by the variance in equity markets compared to prior year, partially offset by favorable variances in FIA reserves.    

The Net amortization of DAC and VOBA for the year ended December 31, 2011 experienced a favorable variance driven by lower actual gross profits, as well as higher estimated future gross profits.

   Income Taxes   

Income tax expense increased for the year ended December 31, 2011 primarily due to an increase in income before taxes partially offset by a decrease in the dividends received deduction and a reduction in the tax valuation allowance.

                                           64  --------------------------------------------------------------------------------

Year ended December 31, 2010 compared to year ended December 31, 2009

    The Company's results of operations for the year ended December 31, 2010, and changes therein, is primarily impacted by lower Net realized capital losses and higher Fee income partially offset by higher Interest credited and other benefits to contract owners, lower Premiums, an increase in Net amortization of DAC and VOBA, lower Net investment income, higher Operating expenses and a lower Income tax benefit.                                          Years Ended December 31,       $ Increase    % Increase                                         2010             2009        (Decrease)    (Decrease) Revenues: Net investment income              $    1,356.4       $ 1,412.4     $     (56.0)       (4.0)% Fee income                              1,091.3           943.2            148.1        15.7% Premiums                                  280.6           786.1          (505.5)      (64.3)% Net realized capital losses: Total other-than-temporary impairment losses                        (300.1 )        (538.9 )          238.8        44.3% Portion of other-than-temporary impairment losses recognized in Other comprehensive income (loss)                                    105.7            49.3             56.4           NM Net other-than-temporary impairments recognized in earnings                                 (194.4 )        (489.6 )          295.2        60.3% Other net realized capital losses                                   (611.3 )      (2,007.5 )        1,396.2        69.5% Total net realized capital losses                                   (805.7 )      (2,497.1 )        1,691.4        67.7% Other income                                 -              0.9            (0.9)     (100.0)% Total revenue                           1,922.6           645.5          1,277.1           NM Benefits and expenses: Interest credited and other benefits to contract owners               985.0           682.4            302.6        44.3% Operating expenses                        428.4           386.1             42.3        11.0% Net amortization of deferred policy acquisition costs and value of business acquired                411.6          (362.2 )          773.8           NM Interest expense                           32.1            32.9            (0.8)       (2.4)% Other expense                              39.3            39.6            (0.3)       (0.8)% Total benefits and expenses             1,896.4           778.8          1,117.6           NM Income (loss) before income taxes                                      26.2          (133.3 )          159.5           NM Income tax benefit                        (55.1 )        (136.5 )           81.4        59.6% Net income                         $       81.3       $     3.2     $       78.1           NM Effective tax rate                      (210.3) %         102.4 % NM - Not meaningful.                                            65 

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   Revenues   

Total revenue increased for the year ended December 31, 2010, primarily reflecting lower Net realized capital losses and higher Fee income, partially offset by lower Premiums and Net investment income.

    The decrease in Total net realized capital losses for the year ended December 31, 2010 is primarily due to a favorable change in derivatives related to (a) hedging of variable annuity guaranteed death benefits, (b) decreased losses related to a hedging program designed to mitigate the impact of potential declines in equity markets and their impact on regulatory capital, and (c) hedging of variable annuity guaranteed living benefits ("VAGLB") ceded to SLDI under the combined coinsurance and coinsurance funds withheld agreement which commenced in the third quarter of 2009.  However, the losses on the VAGLB are ceded to SLDI and reported as a corresponding decrease in Interest credited and other benefits to policyholders.  Lower credit and intent related impairments on fixed maturities, primarily due to the improved economic environment and falling interest rates, also contributed to this favorable variance.    

The decrease in Net investment income for the year ended December 31, 2010 is mainly due to lower interest income earned on fixed maturities due to lower average interest rates.

The increase in Fee income for the year ended December 31, 2010 reflects an increase in average variable AUM, primarily driven by the rise in average equity market levels.

    Premiums for the year ended December 31, 2010 decreased due to a 2009 transaction pursuant to which the Company assumed Group Annual Term Life premiums from ReliaStar Life Insurance Company ("RLI"), an affiliate, under the bulk reinsurance agreements executed in 2009, a transaction in 2010 to cede business to SLDI and the impact of sale of the U.S. Group Reinsurance, pursuant to a reinsurance agreement, with Reinsurance Group of America, effective January 1, 2010.    Benefits and Expenses   

Total benefits and expenses increased for the year ended December 31, 2010 primarily due to an increase in Interest credited and other benefits to contract owners, higher Net amortization of DAC and VOBA and higher Operating expenses.

    The increase in Interest credited and other benefits to contract owners for the year ended December 31, 2010 reflects the transfer of gains (losses) on futures and investment income under the combined coinsurance and coinsurance funds withheld agreement with SLDI. The corresponding losses and investment income are reported in Total net realized capital gains (losses) and Net investment income. In addition, interest credited and other benefits to contract owners reflects a unfavorable change in variable annuity guaranteed benefit reserves which was primarily driven by the variance in equity markets during 2010 and higher amortization of sales inducements                                           66  --------------------------------------------------------------------------------    due to higher current period gross profits.  These items were partially offset by lower reserves due to the Company entering into a new reinsurance agreement which ceded a block of employee benefits business to SLDI.    The Net amortization of DAC and VOBA increased for the year ended December 31, 2010 driven by higher actual gross profits mainly resulting from improved net realized capital losses.    Operating expenses for the year ended December 31, 2010 increased mainly due to lower capitalizable commissions due to lower sales in the current year partially offset by lower expenses due to sale of Group Reinsurance business.    Income Taxes    Income tax benefit decreased for the year ended December 31, 2010 primarily due to an increase in income before taxes and tax valuation allowance, partially offset by an increase in the dividends received deduction and favorable audit settlements.    Financial Condition    Investments    Investment Strategy    The Company's investment strategy seeks to achieve sustainable risk-adjusted returns by focusing on principal preservation, disciplined matching of asset characteristics with liability requirements, and the diversification of risks. Investment activities are undertaken according to investment policy statements that contain internally established guidelines and risk tolerances and in all cases are required to comply with applicable laws and insurance regulations. Risk tolerances are established for credit risk, credit spread risk, market risk, liquidity risk, and concentration risk across issuers, sectors and asset types that seek to mitigate the impact of cash flow variability arising from these risks.    Investments are managed by ING Investment Management LLC, an affiliate of the Company, pursuant to an investment advisory agreement. Segmented portfolios are established for groups of products with similar liability characteristics within the Company.  The Company's investment portfolio consists largely of high quality fixed maturity securities and short-term investments, investments in commercial mortgage loans, limited partnerships, and other instruments, including a small amount of equity holdings. Fixed maturity securities include publicly issued corporate bonds, government bonds, privately placed notes and bonds, mortgage-backed securities, and asset-backed securities. The Company uses derivatives for hedging purposes and to replicate exposure to other assets as a more efficient means of assuming credit exposure similar to bonds of the underlying issuer(s).                                           67 

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   Portfolio Composition    The following tables present the investment portfolio at December 31, 2011 and 2010.                                                       2011                   2010                                             Carrying      % of      Carrying     % of                                               Value       Total      Value      Total Fixed maturities, available-for-sale, including securities pledged                $ 22,358.5     71.8%   $ 21,806.9    78.8% Fixed maturities, at fair value using the fair value option                            335.0      1.1%        237.7     0.9% Equity securities, available-for-sale             27.7      0.1%         66.1     0.2% Short-term investments                         2,397.0      7.7%        939.2     3.4% Mortgage loans on real estate                  3,137.3     10.1%      2,967.9    10.7% Policy loans                                     112.0      0.4%        122.1     0.4% Loan - Dutch State obligation                    658.2      2.1%        843.9     3.1% Limited partnerships/corporations                305.4      1.0%        295.8     1.1% Derivatives                                    1,670.7      5.4%        293.1     1.1% Other investments                                 82.2      0.3%         82.1     0.3% Total investments                           $ 31,084.0    100.0%   $ 27,654.8   100.0%                                            68 

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   Fixed Maturities   

Available-for-sale and fair value option fixed maturities and equity securities were as follows as of December 31, 2011.

                                                     Gross          Gross                                                 Unrealized     Unrealized                                   Amortized      Capital        Capital         Fair                                     Cost          Gains          Losses        Value       OTTI(2) Fixed maturities: U.S. Treasuries                   $  1,692.9    $      92.9    $        -    $  1,785.8    $     - U.S. government agencies and authorities                             19.9            3.8             -          23.7          - State, municipalities, and political subdivisions                  98.9            6.8            0.9  

104.8 -

  U.S. corporate securities: Public utilities                     1,916.4          188.4            9.7      2,095.1          - Other corporate securities           7,611.3          596.1           31.7      8,175.7          - Total U.S. corporate securities                           9,527.7          784.5           41.4     10,270.8          -  Foreign securities(1): Government                             349.0           26.7            5.4        370.3          - Other                                4,939.4          336.8           64.4      5,211.8         0.1 Total foreign securities             5,288.4          363.5           69.8      5,582.1         0.1  Residential mortgage-backed securities                           2,090.0          245.2           90.9      2,244.3        76.0 Commercial mortgage-backed securities                           1,910.3          118.0           26.4      2,001.9         1.9 Other asset-backed securities          734.3           15.4           69.6  

680.1 -

  Total fixed maturities, including securities pledged        21,362.4        1,630.1          299.0     22,693.5        78.0 Less: securities pledged               965.0           49.8            2.0      1,012.8          - Total fixed maturities              20,397.4        1,580.3          297.0     21,680.7        78.0 Equity securities                       26.7            1.8            0.8         27.7          - Total investments                 $ 20,424.1    $   1,582.1    $     297.8   $ 21,708.4    $   78.0    

(1) Primarily U.S. dollar denominated.

(2) Represents other-than-temporary impairments reported as a component of Other comprehensive income ("noncredit impairments").

                                       69  --------------------------------------------------------------------------------

Available-for-sale and fair value option fixed maturities and equity securities were as follows as of December 31, 2010.

                                                     Gross         Gross                                                Unrealized     Unrealized                                   Amortized      Capital       Capital         Fair                                     Cost          Gains         Losses        Value       OTTI(2) Fixed maturities: U.S. Treasuries                   $  1,595.7    $     19.4    $       2.4   $  1,612.7    $     - U.S. government agencies and authorities                             24.2           0.3            0.2         24.3          - State, municipalities, and political subdivisions                 126.5           3.6           11.6   

118.5 -

  U.S. corporate securities: Public utilities                     1,609.6          83.9           19.8      1,673.7          - Other corporate securities           7,433.9         367.2           62.1      7,739.0         0.3 Total U.S. corporate securities                           9,043.5         451.1           81.9      9,412.7         0.3  Foreign securities(1): Government                             474.6          39.0            4.3        509.3          - Other                                4,742.9         216.7           70.0      4,889.6         0.1 Total foreign securities             5,217.5         255.7           74.3      5,398.9         0.1  Residential mortgage-backed securities                           2,028.7         240.8           98.5      2,171.0        67.2 Commercial mortgage-backed securities                           2,112.2         125.8           39.1      2,198.9         7.3 Other asset-backed securities        1,213.9          17.8          124.1   

1,107.6 32.1

  Total fixed maturities, including securities pledged        21,362.2       1,114.5          432.1     22,044.6       107.0 Less: securities pledged               886.6          17.5           14.7        889.4          - Total fixed maturities              20,475.6       1,097.0          417.4     21,155.2       107.0 Equity securities                       59.2           6.9             -          66.1          - Total investments                 $ 20,534.8    $  1,103.9    $     417.4   $ 21,221.3    $  107.0    

(1) Primarily U.S. dollar denominated.

(2) Represents other-than-temporary impairments reported as a component of Other comprehensive income ("noncredit impairments").

    It is management's objective that the portfolio of fixed maturities be of high quality and be well diversified by market sector.  The fixed maturities in the Company's portfolio are generally rated by external rating agencies and, if not externally rated, are rated by the Company on a basis believed to be similar to that used by the rating agencies.  At December 31, 2011 and 2010, the average quality rating of the Company's fixed maturities portfolio was A.                                           70  --------------------------------------------------------------------------------

Fixed Maturity Securities Credit Quality - Ratings

    The Securities Valuation Office ("SVO") of the National Association of Insurance Commissioners ("NAIC") evaluates the fixed maturity security investments of insurers for regulatory reporting and capital assessment purposes and assigns securities to one of six credit quality categories called "NAIC designations." An internally developed rating is used as permitted by the NAIC if no rating is available. The NAIC designations are generally similar to the credit quality designations of a Nationally Recognized Statistical Rating Organization ("NRSRO") for marketable fixed maturity securities, called "rating agency designations," except for certain structured securities as described below. NAIC designations of "1," highest quality, and "2," high quality, include fixed maturity securities generally considered investment grade ("IG") by such rating organizations. NAIC designations 3 through 6 include fixed maturity securities generally considered below investment grade ("BIG") by such rating organizations.    The NAIC adopted revised designation methodologies for non-agency RMBS, including RMBS backed by subprime mortgage loans reported within ABS, that became effective December 31, 2009 and for CMBS that became effective December 31, 2010. The NAIC's objective with the revised designation methodologies for these structured securities was to increase the accuracy in assessing expected losses, and to use the improved assessment to determine a more appropriate capital requirement for such structured securities. The revised methodologies reduce regulatory reliance on rating agencies and allow for greater regulatory input into the assumptions used to estimate expected losses from such structured securities.    As a result of time lags between the funding of investments, the finalization of legal documents and the completion of the SVO filing process, the fixed maturity portfolio generally includes securities that have not yet been rated by the SVO as of each balance sheet date, such as private placements. Pending receipt of SVO ratings, the categorization of these securities by NAIC designation is based on the expected ratings indicated by internal analysis.    Information about the Company's fixed maturity securities holdings, including securities pledged, by NAIC designations is set forth in the following tables. Corresponding rating agency designation does not directly translate to NAIC designation, but represents the Company's best estimate of comparable ratings from rating agencies, including Moody's, S&P, and Fitch. If no rating is available from a rating agency, then an internally developed rating is used.    It is management's objective that the portfolio of fixed maturities be of high quality and be well diversified by market sector. The fixed maturities in the Company's portfolio are generally rated by external rating agencies and, if not externally rated, are rated by the Company on a basis believed to be similar to that used by the rating agencies. Ratings are derived from three NRSRO ratings and are applied as follows based on the number of agency rating received:                                           71  --------------------------------------------------------------------------------

   †               when three ratings are received then the middle rating is applied;  †               when two ratings are received then the lower rating is applied;  †               when a single rating is received, the NRSRO rating is applied;  †               and, when ratings are unavailable then an internal rating is applied.    Total fixed maturities by NAIC quality designation category, including securities pledged to creditors, were as follows at December 31, 2011 and 2010.                                      2011 NAIC Quality      Fair        % of     Amortized     % of Designation       Value      Total       Cost       Total 1               $ 13,271.5    58.5%    $ 12,420.9    58.2% 2                  8,152.0    35.9%       7,679.6    36.0% 3                    905.4     4.0%         907.9     4.2% 4                    171.5     0.8%         199.3     0.9% 5                    118.2     0.5%         113.6     0.5% 6                     74.9     0.3%          41.1     0.2% Total           $ 22,693.5   100.0%    $ 21,362.4   100.0%                                    2010 NAIC Quality      Fair        % of     Amortized     % of Designation       Value      Total       Cost       Total 1               $ 13,525.5    61.3%    $ 13,085.5    61.2% 2                  6,879.0    31.2%       6,613.4    31.0% 3                  1,142.3     5.2%       1,100.4     5.2% 4                    411.9     1.9%         465.0     2.2% 5                     51.2     0.2%          51.8     0.2% 6                     34.7     0.2%          46.1     0.2% Total           $ 22,044.6   100.0%    $ 21,362.2   100.0%                                            72 

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Total fixed maturities by NRSRO quality rating category, including securities pledged to creditors, were as follows at December 31, 2011 and 2010.

                                      2011 NRSRO quality      Fair        % of      Amortized    % of    rating          Value       Total       Cost       Total AAA              $  5,266.4    23.2 %    $  4,892.1    22.9 % AA                  1,464.5     6.5 %       1,373.7     6.4 % A                   6,327.4    27.9 %       5,895.1    27.6 % BBB                 8,107.7    35.6 %       7,636.8    35.8 % BB                    831.4     3.7 %         809.8     3.8 % B and below           696.1     3.1 %         754.9     3.5 % Total            $ 22,693.5   100.0 %    $ 21,362.4   100.0 %                                         2010 NRSRO quality       Fair       % of       Amortized    % of    rating          Value       Total        Cost       Total AAA              $   5,137.8    23.3 %    $  4,883.3    22.9 % AA                   1,860.4     8.4 %       1,843.0     8.6 % A                    6,112.9    27.7 %       5,923.3    27.7 % BBB                  6,989.8    31.8 %       6,702.4    31.4 % BB                     990.0     4.5 %         955.0     4.5 % B and below            953.7     4.3 %       1,055.2     4.9 % Total            $  22,044.6   100.0 %    $ 21,362.2   100.0 %    

At December 31, 2011 and 2010, 93.2% and 91.2% of the fixed maturities were invested in securities rated BBB and above, respectively.

    Fixed maturities rated BB and below may have speculative characteristics, and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity of the issuer to make principal and interest payments than is the case with higher rated fixed maturities.                                           73  --------------------------------------------------------------------------------

Total fixed maturities, by market sector, including securities pledged to creditors, were as follows at December 31, 2011 and 2010.

                                                                   2011                                                Fair       % of       Amortized    % of                                                Value      Total        Cost       Total U.S. Treasuries                              $  1,785.8     7.9 %    $  1,692.9     7.9 % U.S. government agencies and authorities           23.7     0.1 %          19.9     0.1 % U.S. corporate, state, and municipalities      10,375.6    45.7 %       9,626.6    45.1 % Foreign                                         5,582.1    24.6 %       5,288.4    24.8 % Residential mortgage-backed                     2,244.3     9.9 %       2,090.0     9.8 % Commercial mortgage-backed                      2,001.9     8.8 %       1,910.3     8.9 % Other asset-backed                                680.1     3.0 %         734.3     3.4 % Total                                        $ 22,693.5   100.0 %    $ 21,362.4   100.0 %                                                                     2010                                                Fair       % of       Amortized    % of                                                Value      Total        Cost       Total U.S. Treasuries                              $  1,612.7     7.3 %    $  1,595.7     7.5 % U.S. government agencies and authorities           24.3     0.1 %          24.2     0.1 % U.S. corporate, state, and municipalities       9,531.2    43.2 %       9,170.0    42.9 % Foreign                                         5,398.9    24.5 %       5,217.5    24.4 % Residential mortgage-backed                     2,171.0     9.9 %       2,028.7     9.5 % Commercial mortgage-backed                      2,198.9    10.0 %       2,112.2     9.9 % Other asset-backed                              1,107.6     5.0 %       1,213.9     5.7 % Total                                        $ 22,044.6   100.0 %    $ 21,362.2   100.0 %    

The fair value and amortized cost of fixed maturities, including securities pledged, as of December 31, 2011, are shown below by contractual maturity. Actual maturities may differ from contractual maturities as securities may be restructured, called, or prepaid.

                                                       Fair        Amortized                                                     Value         Cost Due to mature: One year or less                                  $  1,472.2    $  1,444.7 After one year through five years                    5,669.9       5,479.9 After five years through ten years                   6,390.4       5,987.4 After ten years                                      4,234.7       3,715.8 Mortgage-backed securities                           4,246.2       4,000.3 Other asset-backed securities                          680.1         734.3 

Fixed maturities, including securities pledged $ 22,693.5$ 21,362.4

                                           74 

--------------------------------------------------------------------------------    The following tables set forth the composition of the U.S. and foreign corporate securities within fixed maturity portfolio by industry category as of December 31, 2011 and 2010:                                                      Gross         Gross                                                Unrealized     Unrealized                                   Amortized      Capital       Capital         Fair                                     Cost          Gains         Losses         Value 2011 Communications                    $  1,109.9    $     96.0    $       5.3    $  1,200.6 Financial                            1,948.2         115.1           54.3       2,009.0 Industrial and other companies       8,453.1         634.0           33.2       9,053.9 Utilities                            2,589.6         244.5           10.5       2,823.6 Transportation                         366.3          31.7            2.5         395.5 Total                             $ 14,467.1    $  1,121.3    $     105.8    $ 15,482.6  2010 Communications                    $  1,121.7    $     61.5    $      11.1    $  1,172.1 Financial                            1,886.2         140.0           30.9       1,995.3 Industrial and other companies       8,184.3         341.9           70.8       8,455.4 Utilities                            2,182.1         106.8           34.4       2,254.5 Transportation                         412.1          17.6            4.7         425.0 Total                             $ 13,786.4    $    667.8    $     151.9    $ 14,302.3    

The Company did not have any investments in a single issuer, other than obligations of the U.S. government and government agencies and the Dutch State loan obligation, with a carrying value in excess of 10.0% of the Company's Shareholder's equity at December 31, 2011 and 2010.

At December 31, 2011 and 2010, fixed maturities with fair values of $12.2 and $12.4, respectively, were on deposit as required by regulatory authorities.

    The Company invests in various categories of collateralized mortgage obligations ("CMOs"), including CMOs that are not agency-backed, that are subject to different degrees of risk from changes in interest rates and defaults. The principal risks inherent in holding CMOs are prepayment and extension risks related to dramatic decreases and increases in interest rates resulting in the prepayment of principal from the underlying mortgages, either earlier or later than originally anticipated. At December 31, 2011 and 2010, approximately 29.3% and 22.9%, respectively, of the Company's CMO holdings were invested in those types of CMOs, such as interest-only or principal-only strips, which are subject to more prepayment and extension risk than traditional CMOs.    The Company is a member of the Federal Home Loan Bank of Des Moines ("FHLB") and is required to maintain a collateral deposit that backs funding agreements issued to the FHLB.  At December 31, 2011 and 2010, the Company had $1,579.6 in non-putable funding agreements, including accrued interest, issued to the FHLB. At December 31, 2011 and 2010, assets with a market value of $1,897.9 and $1,930.1, respectively, collateralized the funding agreements issued to the FHLB.  Assets                                           75 

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pledged to the FHLB are included in Fixed maturities, available-for-sale, on the Balance Sheets.

Subprime and Alt-A Mortgage Exposure

    Underlying collateral has continued to reflect the problems associated with a housing market that has seen substantial price declines and an employment market that has declined significantly and remains under stress.  Credit spreads have widened meaningfully from issuance and rating agency downgrades have been widespread and severe within the sector.  Over the course of 2010 and early 2011, price transparency and liquidity for bonds backed by subprime mortgages improved with the reduced volatility across broader risk markets and apparent increase in overall risk appetite. However, beginning in second quarter of 2011, the market for the lower quality, distressed segments of the subprime and Alt-A mortgage markets again displayed weakness. Distortions to the amount of available supply in the market of these asset types had the impact of increasing volatility and reducing liquidity in these segments of the non-agency RMBS markets.  In the second half of 2011, while these supply problems dissipated, additional headwinds from fundamental problems in the housing market and uncertainty from the broader global markets negatively impacted credit risk premiums, further pressuring bond prices lower.  In managing its risk exposure to subprime and Alt-A mortgages, the Company takes into account collateral performance and structural characteristics associated with its various positions.    The Company does not originate or purchase subprime or Alt-A whole-loan mortgages. The Company does have exposure to RMBS and ABS.  Subprime lending is the origination of loans to customers with weaker credit profiles. The Company defines Alt-A Loans to include the following: residential mortgage loans to customers who have strong credit profiles but lack some element(s), such as documentation to substantiate income; residential mortgage loans to borrowers that would otherwise be classified as prime but whose loan structure provides repayment options to the borrower that increase the risk of default; and any securities backed by residential mortgage collateral not clearly identifiable as prime or subprime.    The Company's exposure to subprime mortgages was primarily in the form of ABS structures collateralized by subprime residential mortgages, and the majority of these holdings were included in other asset-backed securities in the fixed maturities by market sector table previously referenced. As of December 31, 2011, the fair value and gross unrealized losses related to the Company's exposure to subprime mortgages were $189.3 and $69.7, respectively, representing 0.8% of total fixed maturities, including securities pledged. As of December 31, 2010, the fair value and gross unrealized losses related to the Company's exposure to subprime mortgages were $456.3 and $109.9, respectively, representing 2.1% of total fixed maturities.                                           76  --------------------------------------------------------------------------------

Transfer of Alt-A RMBS Participation Interest and Related Loan to Dutch State

    On January 26, 2009, ING announced it reached an agreement, for itself and on behalf of certain ING affiliates including the Company, with the Dutch State on an Illiquid Assets Back-Up Facility covering 80% of ING's Alt-A RMBS. Refer to Liquidity and Capital Resources contained herein.    

The following tables summarize the Company's exposure to subprime mortgage-backed holdings by credit quality using NAIC designations, NRSRO ratings and vintage year as of December 31, 2011 and 2010:

                 % of Total Subprime Mortgage-backed Securities         NAIC Designation        NRSRO Rating                Vintage 2011         1           79.0%   AAA              1.6%   2007              18.9%         2            6.2%   AA               5.9%   2006               6.6%         3           10.5%   A                7.9%   2005 and prior    74.5%         4            1.5%   BBB              9.8%                    100.0%         5            1.3%   BB and below    74.8%         6            1.5%                  100.0%                    100.0%  2010         1           76.4%   AAA              9.3%   2007              39.7%         2            5.2%   AA              10.7%   2006               6.9%         3            2.0%   A                9.5%   2005 and prior    53.4%         4           13.3%   BBB              8.4%                    100.0%         5            0.2%   BB and below    62.1%         6            2.9%                  100.0%                    100.0%     The Company's exposure to Alt-A mortgages is included in residential mortgage-backed securities in the fixed maturities by market sector table above. As of December 31, 2011, the fair value and gross unrealized losses aggregated to $124.2 and $52.7, representing 0.5% of total fixed maturities, including securities pledged. As of December 31, 2010, the fair value and gross unrealized losses aggregated to $158.3 and $51.1, respectively, representing 0.7% of total fixed maturities.                                           77 

--------------------------------------------------------------------------------    The following tables summarize the Company's exposure to Alt-A mortgage-backed holdings by credit quality using NAIC designations, NRSRO ratings and vintage year as of December 31, 2011 and 2010:                       % of Total Alt-A Mortgage-backed Securities         NAIC Designation        NRSRO Rating                Vintage 2011         1           39.0%   AAA              0.4%   2007              28.3%         2           12.1%   AA               1.8%   2006              18.3%         3           12.5%   A                5.1%   2005 and prior    53.4%         4           28.5%   BBB              3.1%                    100.0%         5            7.0%   BB and below    89.6%         6            0.9%                  100.0%                    100.0%  2010         1           48.0%   AAA              5.5%   2007              29.7%         2            8.3%   AA               3.7%   2006              19.8%         3           14.7%   A                0.8%   2005 and prior    50.5%         4           24.6%   BBB              1.7%                    100.0%         5            4.1%   BB and below    88.3%         6            0.3%                  100.0%                    100.0%    

Commercial Mortgage-backed and Other Asset-backed Securities

    Delinquency rates on commercial mortgages have remained elevated in recent months. However, the steep pace of increases observed in the months following the credit crisis has slowed, and some recent months have posted month over month declines in delinquent mortgages. In addition, other performance metrics like vacancies, property values and rent levels have exhibited improvements, providing early signals of a recovery in commercial real estate. In addition, the primary market for CMBS continued its recovery from the credit crisis, with total new issuance in 2011 higher for the third straight year.  This had the impact of increasing credit availability within the commercial real estate universe. For consumer asset-backed securities, delinquency and loss rates have continued to decline. While there are concerns with consumer loans as a result of the current macro-economic environment, improvements in various credit metrics across multiple types of asset-backed loans have been observed on a sustained basis.    As of December 31, 2011 and 2010, the fair value of the Company's CMBS totaled $2.0 billion and $2.2 billion, respectively, and other ABS, excluding subprime exposure, totaled $496.2 and $656.7, respectively. As of December 31, 2011, the gross unrealized losses related to CMBS totaled $26.4 and gross unrealized losses related to Other ABS, excluding subprime exposure, totaled $0.2. CMBS investments represent pools of commercial mortgages that are broadly diversified across property types and geographical areas.                                           78  --------------------------------------------------------------------------------

The following tables summarize the Company's exposure to CMBS holdings by credit quality using NAIC designations, NRSRO ratings and vintage year as of December 31, 2011 and 2010:

                                % of Total CMBS        NAIC Designation        NRSRO Rating                Vintage 2011        1           97.1%   AAA             52.7%   2008               0.5%        2            1.8%   AA              18.4%   2007              25.9%        3            0.0%   A               12.7%   2006              31.2%        4            0.0%   BBB              8.8%   2005 and prior    42.4%        5            0.0%   BB and below     7.4%                    100.0%        6            1.1%                  100.0%                   100.0%  2010        1           91.7%   AAA             52.5%   2008               0.9%        2            1.5%   AA              21.4%   2007              23.6%        3            1.4%   A               13.4%   2006              24.6%        4            4.8%   BBB              6.4%   2005 and prior    50.9%        5            0.6%   BB and below     6.3%                    100.0%        6            0.0%                  100.0%                   100.0%     As of December 31, 2011, the other ABS was also broadly diversified both by type and issuer with credit card receivables, collateralized loan obligations and automobile receivables, comprising 31.2%, 14.2%, and 30.9%, respectively, of total other ABS, excluding subprime exposure.  As of December 31, 2010, the other ABS was also broadly diversified both by type and issuer with credit card receivables, collateralized loan obligations and automobile receivables, comprising 31.2%, 25.6%, and 28.5%, respectively, of total other ABS, excluding subprime exposure.                                           79 

--------------------------------------------------------------------------------    The following tables summarize the Company's exposure to other ABS holdings, excluding subprime exposure, by credit quality using NAIC designations, NRSRO ratings and vintage year as of December 31, 2011 and 2010:                               % of Total other ABS        NAIC Designation        NRSRO Rating                Vintage 2011        1           96.0%   AAA             86.1%   2011              18.7%        2            1.8%   AA               3.8%   2010              10.7%        3            0.0%   A                3.0%   2009               8.3%        4            0.1%   BBB              3.8%   2008               3.6%        5            2.1%   BB and below     3.3%   2007              19.3%        6            0.0%                  100.0%   2006              20.2%                   100.0%                           2005 and prior    19.2%                                                                     100.0%  2010        1           86.7%   AAA             66.0%   2010              13.1%        2            9.4%   AA              17.5%   2009              16.2%        3            1.2%   A                3.1%   2008              10.9%        4            0.2%   BBB              9.4%   2007              18.1%        5            1.4%   BB and below     4.0%   2006              16.2%        6            1.1%                  100.0%   2005 and prior    25.5%                   100.0%                                            100.0%    

Mortgage Loans on Real Estate

    The Company's mortgage loans on real estate are all commercial mortgage loans, which totaled $3.1 billion and $3.0 billion as of December 31, 2011 and 2010, respectively. These loans are reported at amortized cost, less impairment write-downs and allowance for losses.    The Company diversifies its commercial mortgage loan portfolio by geographic region and property type to reduce concentration risk.  The Company manages risk when originating commercial mortgage loans by generally lending only up to 75% of the estimated fair value of the underlying real estate.  Subsequently, the Company continuously evaluates all mortgage loans based on relevant current information including an appraisal of loan-specific credit quality, property characteristics and market trends. Loan performance is monitored on a loan-specific basis through the review of submitted appraisals, operating statements, rent revenues and annual inspection reports, among other items. This review ensures properties are performing at a consistent and acceptable level to secure the debt.    All commercial mortgages are evaluated for the purpose of quantifying the level of risk.  Those loans with higher risk are placed on a watch list and are closely monitored for collateral deficiency or other credit events that may lead to a potential loss of principal or interest.  If the value of any mortgage loan is determined to be impaired (i.e., when it is probable that the Company will be unable to collect on all amounts due according to the contractual terms of the loan agreement), the carrying value of the mortgage loan is reduced to the lower of the present value of expected                                           80  --------------------------------------------------------------------------------    cash flows from the loan, discounted at the loan's effective interest rate, or fair value of the collateral.  Impairments taken on the mortgage loan portfolio were $6.9, $6.3, and $20.9 for the years ended December 31, 2011, 2010, and 2009, respectively. For those mortgages that are determined to require foreclosure, the carrying value is reduced to the fair value of the underlying collateral, net of estimated costs to obtain and sell at the point of foreclosure.  There were no mortgage loans in the Company's portfolio in arrears with respect to principal and interest at December 31, 2011 and 2010.  Due to challenges that the economy presents to the commercial mortgage market, effective with the third quarter of 2009, the Company recorded an allowance for probable incurred, but not specifically identified, losses related to factors inherent in the lending process. At December 31, 2011 and 2010, the Company had a $1.5 and $3.0 allowance for mortgage loan credit losses, respectively.    Loan-to-value ("LTV") and debt service coverage ("DSC") ratios are measures commonly used to assess the risk and quality of commercial mortgage loans.  The LTV ratio, calculated at time of origination, is expressed as a percentage of the amount of the loan relative to the value of the underlying property.  The DSC ratio, based upon the most recently received financial statements, is expressed as a percentage of the amount of a property's net income to its debt service payments.  These ratios are utilized as part of the review process described above.  LTV and DSC ratios as of December 31, 2011 and 2010, are as follows:                                       2011(1)      2010(1) Loan to Value Ratio: 0% - 50%                           $   920.9    $ 1,140.4 50% - 60%                              833.9        707.7 60% - 70%                            1,173.2        903.4 70% - 80%                              191.3        197.6 80% - 90%                               19.5         21.8

Total Commercial Mortgage Loans $ 3,138.8$ 2,970.9

    (1)  Balances do not include allowance for mortgage loan credit losses.                                                                2011(1)     

2010(1)

 Debt Service Coverage Ratio: Greater than 1.5x                                           $ 2,105.3    $ 2,038.3 1.25x - 1.5x                                                    565.8        387.9 1.0x - 1.25x                                                    355.5        255.2 Less than 1.0x                                                  112.2        144.0 Mortgages secured by loans on land or construction loans           -        

145.5

 Total Commercial Mortgage Loans                             $ 3,138.8    $ 2,970.9     (1)  Balances do not include allowance for mortgage loan credit losses.                                           81 

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Properties collateralizing mortgage loans are geographically dispersed throughout the United States, as well as diversified by property type, as reflected in the following tables as of December 31, 2011 and 2010.

                                                 2011(1)                           2010(1)                                         Gross                             Gross                                     Carrying Value     % of Total     Carrying Value     % of Total Commercial Mortgage Loans by US Region: Pacific                             $         702.5         22.4%     $         741.0         24.9% South Atlantic                                582.8         18.6%               546.8         18.4% Middle Atlantic                               361.7         11.5%               385.0         13.0% East North Central                            411.4         13.1%               289.1          9.7% West South Central                            414.1         13.2%               388.6         13.1% Mountain                                      364.9         11.6%               361.9         12.2% New England                                    82.2          2.6%                81.1          2.7% West North Central                            138.2          4.4%               113.3          3.8% East South Central                             81.0          2.6%                64.1          2.2% Total Commercial Mortgage Loans     $       3,138.8        100.0%     $       2,970.9        100.0%    

(1) Balances do not include allowance for mortgage loan credit losses.

                                                  2011(1)                           2010(1)                                         Gross                             Gross                                     Carrying Value     % of Total     Carrying Value     % of Total Commercial Mortgage Loans by Property Type: Apartments                          $         371.5         11.8%     $         451.0         15.2% Hotel/Motel                                   129.6          4.1%               177.4          6.0% Industrial                                  1,223.2         39.0%             1,003.5         33.7% Office                                        542.2         17.3%               542.4         18.3% Other                                          52.3          1.7%               102.7          3.5% Retail                                        807.4         25.7%               693.9         23.3% Mixed use                                      12.6          0.4%                  -           0.0%

Total Commercial Mortgage Loans $ 3,138.8 100.0% $

   2,970.9        100.0%     (1)  Balances do not include allowance for mortgage loan credit losses.                                            82 

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The following tables set forth the breakdown of commercial mortgages by year of origination as of December 31, 2011 and 2010.

                                      2011(1)      2010(1) Year of Origination: 2011                               $   791.2    $      - 2010                                   272.1        230.6 2009                                    77.8         85.3 2008                                   406.5        446.9 2007                                   447.7        572.9 2006 and prior                       1,143.5      1,635.2

Total Commercial Mortgage Loans $ 3,138.8$ 2,970.9

    (1)  Balances do not include allowance for mortgage loan credit losses.      

Troubled Debt Restructuring

    The Company has high quality, well performing portfolios of commercial mortgage loans and private placements.  Under certain circumstances, modifications to these contracts are granted. Each modification is evaluated as to whether a troubled debt restructuring has occurred. A modification is a troubled debt restructure when the borrower is in financial difficulty and the creditor makes concessions. Generally, the types of concessions may include: reduction of the face amount or maturity amount of the debt as originally stated, reduction of the contractual interest rate, extension of the maturity date at an interest rate lower than current market interest rates and/or reduction of accrued interest. The Company considers the amount, timing and extent of the concession granted in determining any impairment or changes in the specific valuation allowance recorded in connection with the troubled debt restructuring. A valuation allowance may have been recorded prior to the quarter when the loan is modified in a troubled debt restructuring. Accordingly, the carrying value (net of the specific valuation allowance) before and after modification through a troubled debt restructuring may not change significantly, or may increase if the expected recovery is higher than the pre-modification recovery assessment. For the year ended December 31, 2011, the Company had one private placement troubled debt restructuring with a pre-modification and post-modification carrying value of $9.8.   

During the twelve months ended December 31, 2011, the Company had no loans modified in a troubled debt restructuring with a subsequent payment default.

                                           83  --------------------------------------------------------------------------------

   Unrealized Capital Losses    Unrealized capital losses (including noncredit impairments) in fixed maturities, including securities pledged to creditors, for IG and BIG securities by duration, based on NAIC designations, were as follows at December 31, 2011 and 2010.                                        2011                                    2010                               % of IG             % of IG             % of IG             % of IG                       IG      and BIG     BIG     and BIG     IG      and BIG     BIG     and BIG Six months or less below amortized cost     $   40.0     13.4%   $  10.9      3.6%   $ 124.6     28.8%   $  12.4       2.9% More than six months and twelve months or less below amortized cost         38.3     12.8%       4.0      1.3%       2.2      0.5%       0.1       0.0% More than twelve months below amortized cost        136.5     45.7%      69.3     23.2%     167.5     38.8%     125.3      29.0% Total unrealized capital loss       $  214.8     71.9%   $  84.2     28.1%   $ 294.3     68.1%   $ 137.8      31.9%     Unrealized capital losses (including noncredit impairments) in fixed maturities, including securities pledged to creditors, for securities rated BBB and above (Investment Grade ("IG")) and securities rated BB and below (Below Investment Grade ("BIG")) by duration, based on NRSRO designations, were as follows at December 31, 2011 and 2010.                                        2011                                    2010                               % of IG             % of IG             % of IG             % of IG                       IG      and BIG     BIG     and BIG     IG      and BIG     BIG     and BIG Six months or less below amortized cost     $   40.3     13.5%   $  10.6      3.5%   $ 125.0     29.0%   $  12.0       2.8% More than six months and twelve months or less below amortized cost         26.9      9.0%      15.4      5.2%       2.2      0.5%       0.1       0.0% More than twelve months below amortized cost         69.8     23.3%     136.0     45.5%      97.8     22.6%     195.0      45.1% Total unrealized capital loss       $  137.0     45.8%   $ 162.0     54.2%   $ 225.0     52.1%   $ 207.1      47.9%                                            84 

--------------------------------------------------------------------------------    Unrealized capital losses (including noncredit impairments), along with the fair value of fixed maturities, including securities pledged to creditors, by market sector and duration were as follows at December 31, 2011 and 2010.                                                                   More Than Six                                                              Months and Twelve                  More Than Twelve                           Six Months or Less                   Months or Less                     Months Below                          Below Amortized Cost               Below Amortized Cost                 Amortized Cost                       Total                                        Unrealized                         Unrealized                       Unrealized                      Unrealized                       Fair Value      Capital Loss      Fair Value       Capital Loss     Fair Value      Capital Loss     Fair Value     Capital Loss 2011 U.S. Treasuries       $         -      $         -       $        -       $         -      $        -      $         -     $        -      $         - U.S. government agencies and authorities                     -                -                -                 -               -                -              -                - U.S. corporate, state, and municipalities               798.9             17.6             97.6               4.1           208.0             20.6        1,104.5             42.3 Foreign                      476.5             30.2             51.1               5.0           339.5             34.6          867.1             69.8 Residential mortgage-backed               74.6              0.9            188.2               5.7           305.6             84.3          568.4             90.9 Commercial mortgage-backed              155.1              1.9            234.7              17.9            35.7              6.6          425.5             26.4 Other asset-backed                  42.6              0.3             26.5               9.6           142.1             59.7          211.2             69.6 Total                 $    1,547.7     $       50.9      $     598.1      $       42.3     $   1,030.9     $      205.8    $   3,176.7     $      299.0  2010 U.S. Treasuries       $      677.8     $        2.4      $        -       $         -      $        -      $         -     $     677.8     $        2.4 U.S. government agencies and authorities                   18.1              0.2               -                 -               -                -            18.1              0.2 U.S. corporate, state, and municipalities             2,494.7             73.0             37.1               1.0           258.9             19.5        2,790.7             93.5 Foreign                    1,277.5             52.8             35.8               1.1           195.4             20.4        1,508.7             74.3 Residential mortgage-backed              472.6              7.2              1.0               0.1           336.5             91.2          810.1             98.5 Commercial mortgage-backed               22.6              0.4              4.3               0.1           390.2             38.6          417.1             39.1 Other asset-backed                 133.5              1.0              8.7               0.0           441.6            123.1          583.8            124.1 Total                 $    5,096.8     $      137.0      $      86.9      $

       2.3     $   1,622.6     $      292.8    $   6,806.3     $      432.1      

Of the unrealized capital losses aged more than twelve months, the average market value of the related fixed maturities was 83.4% of the average book value as of December 31, 2011.

                                           85  --------------------------------------------------------------------------------      Unrealized capital losses (including noncredit impairments) in fixed maturities, including securities pledged to creditors, for instances in which fair value declined below amortized cost by greater than or less than 20% for consecutive periods as indicated in the tables below, were as follows for December 31, 2011 and 2010.                                    Amortized Cost         Unrealized Capital Loss       Number of Securities                                < 20%       > 20%         < 20%          > 20%        < 20%         > 20% 2011 Six months or less below amortized cost                $ 1,638.7    $ 178.0    $       52.5     $    52.5          271            49 More than six months and twelve months or less below amortized cost              645.4       57.1            38.0          17.3           67            22 More than twelve months below amortized cost              735.1      221.4            47.0          91.7          126            80 Total                         $ 3,019.2    $ 456.5    $      137.5     $   161.5          464           151  2010 Six months or less below amortized cost                $ 5,650.7    $  49.3    $      172.3     $    13.2          585            14 More than six months and twelve months or less below amortized cost              289.5       18.9            15.9           4.8           46             3 More than twelve months below amortized cost              688.7      541.3            40.6         185.3           95           137 Total                         $ 6,628.9    $ 609.5    $      228.8     $   203.3          726           154                                            86 

--------------------------------------------------------------------------------    Unrealized capital losses (including noncredit impairments) in fixed maturities, including securities pledged to creditors, by market sector for instances in which fair value declined below amortized cost by greater than or less than 20% for consecutive periods as indicated in the tables below, were as follows for December 31, 2011 and 2010.                                Amortized Cost         Unrealized Capital Loss        Number of Securities                           < 20%        > 20%         < 20%           > 20%        < 20%         > 20% 2011 U.S. Treasuries          $     -      $    -      $        -       $      -            -             - U.S. government agencies and authorities                    -           -               -              -            -             - U.S. corporate, state and municipalities         1,112.3        34.5            32.4            9.9          137             5 Foreign                      850.6        86.3            41.7           28.1          131            12 Residential mortgage-backed              500.9       158.4            31.7           59.2           98            89 Commercial mortgage-backed              446.3         5.6            25.1            1.3           24             1 Other asset-backed           109.1       171.7             6.6           63.0           74            44 Total                    $ 3,019.2    $  456.5    $      137.5     $    161.5          464           151  2010 U.S. Treasuries          $   680.2    $    -      $        2.4     $      -              2           - U.S. government agencies and authorities                   18.3         -               0.2            -              2           - U.S. corporate, state and municipalities         2,850.0        34.2            84.1            9.4          279             6 Foreign                    1,563.7        19.3            69.2            5.1          142             7 Residential mortgage-backed              636.6       272.0            22.1           76.4          121            77 Commercial mortgage-backed              418.6        37.6            22.1           17.0           27             9 Other asset-backed           461.5       246.4            28.7           95.4          153            55 Total                    $ 6,628.9    $  609.5    $      228.8     $    203.3          726           154    

For the year ended December 31, 2011, unrealized capital losses on fixed maturities decreased by $133.1. The decrease in gross unrealized losses is primarily due to recognition of OTTI on Other ABS and CMBS, market improvement of the CMBS portfolio in the second half of 2011 and the overall declining yields and tightening spreads, leading to higher fair values of fixed maturities.

    At December 31, 2011, the Company held no fixed maturity with an unrealized capital loss in excess of $10.0.  At December 31, 2010, the Company held 1 fixed maturity with an unrealized capital loss in excess of $10.0.  The unrealized capital loss on this fixed maturity equaled $17.8, or 4.1% of the total unrealized capital losses, as of December 31, 2010.                                           87  --------------------------------------------------------------------------------    All investments with fair values less than amortized cost are included in the Company's other-than-temporary impairment analysis, and impairments were recognized as disclosed in "Other-Than-Temporary Impairments" ("OTTI"), which follows this section. After detailed impairment analysis was completed, the Company determined that the remaining investments in an unrealized loss position were not other-than-temporarily impaired, and therefore no further other-than-temporary impairment was necessary.    

Other-Than-Temporary Impairments

    The Company evaluates available-for-sale fixed maturity and equity securities for impairment on a quarterly basis.  The assessment of whether impairments have occurred is based on a case-by-case evaluation of the underlying reasons for the decline in estimated fair value. See the "Critical Accounting Policies, Judgments, and Estimates" section for a discussion of the policy used to evaluate whether the investments are other-than temporarily impaired.    The following tables identify the Company's credit-related and intent-related other-than-temporary impairments included in the Statements of Operations, excluding impairments included in Other comprehensive income (loss), by type for the years ended December 31, 2011, 2010, and 2009.                                    2011                        2010                        2009                                        No. of                      No. of                      No. of                        Impairment    Securities    Impairment    Securities    Impairment    Securities U.S. Treasuries        $       -              -    $       -            -      $     114.7           10 U.S. corporate                 9.5           17            4.8           19           55.2           55 Foreign(1)                    27.2           52           30.7           23           31.1           45 Residential mortgage-backed               12.3           65           24.5           67           78.6           84 Commercial mortgage-backed               49.7           14           23.2            7           70.9            5 Other asset-backed            74.8           60          104.6           54          114.5           44 Equity                         -              -              - *          1            3.3            5 Public utilities               -              -            0.3            5            -              - Mortgage loans on real estate                    6.9            5            6.3            5           20.9            8 Limited partnerships                   -              -              -            -            0.4            1 Total                  $     180.4          213    $     194.4          181    $     489.6          257     * Less than $0.1. 

(1) Primary U.S. dollar denominated.

    The above tables include $27.6, $95.5, and $171.2, in other-than-temporary write-downs for the years ended December 31, 2011, 2010, and 2009, respectively, related to credit impairments, which are recognized in earnings. The remaining write-downs are related to intent impairments.                                           88  --------------------------------------------------------------------------------    The following tables summarize these intent impairments, which are also recognized in earnings, by type for the years ended December 31, 2011, 2010, and 2009.                                            2011                        2010                        2009                                                No. of                      No. of                      No. of                                Impairment    Securities    Impairment    Securities    Impairment    Securities U.S. Treasuries                $        -             -    $        -             -    $     114.7           10 U.S. Corporate                         9.5           16            3.8           18           45.9           41 Foreign(1)                            24.1           48           12.8           18           25.6           41 Residential mortgage-backed            1.8            8            6.1           11            2.9            1 Commercial mortgage-backed            45.5           14            3.9            2           70.9            5 Other asset-backed                    71.9           59           72.0           35           58.4           13 Public utilities                        -             -            0.3            5             -             - Total                          $     152.8          145    $      98.9           89    $     318.4          111    

(1) Primarily U.S. dollar denominated.

The Company may sell securities during the period in which fair value has declined below amortized cost for fixed maturities or cost for equity securities. In certain situations, new factors, including changes in the business environment, can change the Company's previous intent to continue holding a security.

The remaining fair value of fixed maturities with other-than-temporary impairments as of December 31, 2011, 2010, and 2009 was $2.1 billion, $2.3 billion, and $2.4 billion, respectively.

    The following tables identify the amount of credit impairments on fixed maturities for the years ended December 31, 2011, 2010, and 2009, for which a portion of the OTTI was recognized in Accumulated other comprehensive income (loss), and the corresponding changes in such amounts.                                                     2011            2010           2009 Balance at January 1                           $    118.2      $   123.3      $       - Implementation of OTTI guidance included in ASC Topic 320(1)                                        -              -    

92.7

 Additional credit impairments: On securities not previously impaired                 5.0           20.0    

21.7

 On securities previously impaired                     6.7           23.4    

13.8

Reductions:

 Intent Impairments                                   (3.4 )         (7.1 ) Securities sold, matured, prepaid or paid down                                                (62.4 )        (41.4 )         (4.9 ) Balance at December 31                         $     64.1      $   118.2      $   123.3    

(1) Represents credit losses remaining in Retained earnings related to the adoption of new guidance on OTTI, included in ASC Topic 320, on April 1, 2009.

                                           89  --------------------------------------------------------------------------------

Net Realized Capital Gains (Losses)

    Net realized capital gains (losses) are comprised of the difference between the amortized cost of investments and proceeds from sale, and redemption, as well as losses incurred due to credit-related and intent-related other-than-temporary impairment of investments and changes in fair value of fixed maturities accounted for using the fair value option and derivatives.  The cost of the investments on disposal is generally determined based on first-in-first-out methodology.  Net realized capital gains (losses) on investments were as follows for the years ended December 31, 2011, 2010, and 2009.                                                     2011            2010            2009  Fixed maturities, available-for-sale, including securities pledged                    $   33.7       $    11.8       $   (298.0 ) Fixed maturities at fair value using the fair value option                                  (34.4 )         (14.6 )  

117.6

 Equity securities, available-for-sale               (0.2 )           1.9              6.4 Derivatives                                        748.7          (795.6 )       (2,307.2 ) Other investments                                   (5.7 )          (9.2 )          (15.9 ) Net realized capital gains (losses)             $  742.1       $  (805.7 )     $ (2,497.1 ) After-tax net realized capital losses           $  591.4       $  (580.7 )     $ (1,590.2 )                                            90 

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   Fair Value Hierarchy    The following tables present the Company's hierarchy for its assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 and 2010.                                                                     2011                                          Level 1        Level 2      Level 3(1)        Total Assets: Fixed maturities including securities pledged: U.S. Treasuries                         $  1,778.0     $      7.8     $       -      $  1,785.8 U.S government agencies and authorities                                     -            23.7             -            23.7 U.S. corporate, state and municipalities                                  -        10,251.1          124.5       10,375.6 Foreign                                         -         5,525.2           56.9        5,582.1 Residential mortgage-backed securities                                      -         2,183.6           60.7        2,244.3 Commercial mortgage-backed securities                                      -         2,001.9             -         2,001.9 Other asset-backed securities                   -           600.8           79.3          680.1 Equity securities, available-for-sale                            11.4             -            16.3           27.7 Derivatives: Interest rate contracts                        4.0        1,596.0             -         1,600.0 Foreign exchange contracts                      -             9.7             -             9.7 Equity contracts                              26.5             -            33.6           60.1 Credit contracts                                -             0.9             -             0.9 Embedded derivative on reinsurance              -              -              -              - Cash and cash equivalents, short-term investments, and short-term investments under securities loan agreement                  2,760.7            5.8             -         2,766.5 Assets held in separate accounts          39,356.9             -              -        39,356.9 Total                                   $ 43,937.5     $ 22,206.5     $    371.3     $ 66,515.3  Liabilities: Investment contract guarantees: Fixed Indexed Annuities ("FIA")         $       -      $       -      $  1,282.2     $  1,282.2 Guaranteed Minimum Withdrawal and Accumulation Benefits ("GMWB" and "GMAB")                                         -              -           114.9          114.9 Embedded derivative on reinsurance              -           230.9             -           230.9 Derivatives: Interest rate contracts                         -           526.7             -           526.7 Foreign exchange contracts                      -            42.4             -            42.4 Equity contracts                               3.3             -            25.1           28.4 Credit contracts                                -             1.2           12.9           14.1 Total                                   $      3.3     $    801.2     $  1,435.1     $  2,239.6     (1)        Level 3 net assets and liabilities accounted for (1.7)% of total net            assets and liabilities measured at fair value on a recurring basis.            Excluding separate accounts assets for which the policyholder bears            the risk, the Level 3 net assets and liabilities in relation to total            net assets and liabilities measured at fair value on a recurring            basis totaled (4.3)%.                                            91 

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                                                                    2010                                          Level 1        Level 2      Level 3(1)        Total Assets: Fixed maturities including securities pledged: U.S. Treasuries                         $  1,552.3     $     60.4     $       -      $  1,612.7 U.S government agencies and authorities                                     -            24.3             -            24.3 U.S. corporate, state and municipalities                                  -         9,491.1           40.1        9,531.2 Foreign                                         -         5,389.1            9.8        5,398.9 Residential mortgage-backed securities                                      -         1,979.5          191.5        2,171.0 Commercial mortgage-backed securities                                      -         2,198.9             -         2,198.9 Other asset-backed securities                   -           458.2          649.4        1,107.6 Equity securities, available-for-sale                            52.6             -            13.5           66.1 Derivatives: Interest rate contracts                        2.6          162.5           12.0          177.1 Foreign exchange contracts                      -             5.1             -             5.1 Equity contracts                              12.4             -            95.3          107.7 Credit contracts                                -             3.2             -             3.2 Embedded derivative on reinsurance              -            20.9             -            20.9 Cash and cash equivalents, short-term investments, and short-term investments under securities loan agreement                  1,155.8             -              -         1,155.8 Assets held in separate accounts          44,413.3             -              -        44,413.3 Total                                   $ 47,189.0     $ 19,793.2     $  1,011.6     $ 67,993.8  Liabilities: Investment contract guarantees: Fixed Indexed Annuities ("FIA")         $       -      $       -      $  1,165.5     $  1,165.5 Guaranteed Minimum Withdrawal and Accumulation Benefits ("GMWB" and "GMAB")                                         -              -            77.0           77.0 Embedded derivative on reinsurance Derivatives: Interest rate contracts                         -           419.2            0.3          419.5 Foreign exchange contracts                      -            42.1             -            42.1 Equity contracts                               0.8             -            16.0           16.8 Credit contracts                                -             0.1           14.4           14.5 Total                                   $      0.8     $    461.4     $  1,273.2     $  1,735.4     (1)        Level 3 net assets and liabilities accounted for (0.4)% of total net            assets and liabilities measured at fair value on a recurring basis.            Excluding separate accounts assets for which the policyholder bears            the risk, the Level 3 net assets and liabilities in relation to total            net assets and liabilities measured at fair value on a recurring            basis totaled (1.2)%.     European Exposures    In the first half of 2010 concerns arose regarding the creditworthiness of several southern European countries, which later spread to other European countries. As a result of these concerns the fair value of sovereign debt decreased and those exposures were being monitored more closely.  With regard to troubled European countries, the Company's main focus is on Greece, Italy, Ireland, Portugal and Spain (henceforth defined as "peripheral Europe") as these countries have applied for                                           92  --------------------------------------------------------------------------------

support from the European Financial Stability Fund ("EFSF") or received support from the European Central Bank ("ECB") via government bond purchases in the secondary market.

    The financial turmoil in Europe continues to be a dominant investment theme across the global capital markets.  While certain aspects of this crisis seem to have stabilized somewhat, the possibility of capital markets volatility spreading through a highly integrated and interdependent banking system remains elevated.  Furthermore, it is the Company's view that the risk among European sovereigns and financial institutions warrants specific scrutiny in addition to its customary surveillance and risk monitoring given how highly correlated these sectors of the region have become.    When quantifying its exposure to the region, the Company attempts to identify the economic country of risk by considering all aspects of the risk to which it is exposed.  Among these factors are the country of the issuer, the country of the issuer's ultimate parent, the corporate and economic relationship between the issuer and its parent, as well as the political, legal, and economic environment in which each functions.  By undertaking this assessment, the Company believes that it develops a more accurate assessment of the actual geographic risk, with a more integrated understanding of all contributing factors to the full risk profile of the issuer.    In the normal course of its on-going risk and portfolio management process, the Company closely monitors compliance with a credit limit hierarchy designed to minimize overly concentrated risk exposures by geography, sector, and issuer. This framework takes into account various factors such as internal and external ratings, capital efficiency, and liquidity and is overseen by a combination of Investment and Corporate Risk Management, as well as insurance portfolio managers focused specifically on managing the investment risk embedded in the Company's portfolio.    As of December 31, 2011, the Company has $455.0 of exposure to peripheral Europe, which consists of a broadly diversified portfolio of credit-related investments in the industrial and utility sectors of $454.5 and derivative assets exposure to financial institutions of $0.5.  For purposes of calculating the derivative assets exposure, the Company has aggregated exposure to single name and portfolio product credit default swaps ("CDS"), as well as all non-CDS derivative exposure for which it either has counterparty or direct credit exposure to a company whose country of risk is in scope. Notably, the Company has no fixed maturity and equity securities exposure to sovereigns or financial institutions in peripheral Europe, the market segment the Company believes is most vulnerable to continued uncertainty and risk. Peripheral European exposure includes exposure to Italy of $179.8, Ireland of $131.2 and Spain of $139.8. Notably, the Company had no exposure to Greece.    Among the remaining $3.1 billion of total non-peripheral European exposure, the Company has a portfolio of credit-related assets similarly diversified by country and sector across developed and developing Europe. Sovereign exposure is $736.9, which consists of fixed maturity and equity securities of $78.7 and loans and receivables of                                           93 

--------------------------------------------------------------------------------    $658.2, which consists of the Dutch State payment obligation to the Company under the Illiquid Assets Back-up Facility (see the Related Party Transactions note to the Financial Statements for further details). The Company also has $672.5 in exposure to financial institutions with a notable concentration in France of $338.9, the United Kingdom of $111.4, and Switzerland of $124.4.  The balance of $2.1 billion is invested across non-peripheral European non-financials.    In addition to notable aggregate concentration to the State of the Netherlands of  (which includes the $658.2 Dutch State payment obligation) and the United Kingdom of $731.4, the Company has significant non-peripheral European total country exposures to Switzerland of $232.8, France of $273.6 and Germany of $218.1.  The Company's financial exposure to the United Kingdom, Switzerland and France is also notable and receives additional scrutiny given the Company's focus on the potential for European contagion to be spread via the banking system.  In each case, the Company believes the primary risk is to market value fluctuations resulting from spread volatility followed by modest default risk should the European crisis fail to be resolved as the Company currently expects.                                           94 

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The following table represents the Company's European exposures at fair value and amortized cost as of December 31, 2011.

                                              Fixed Maturity and Equity Securities                                                                  Derivative Assets                                                                                                       Loan and                                                                                                      Receivables                                                                                  Net Non-US                                                                           Total         Total         Sovereign                                         Non-           Less:         Total,       Funded at                                         Financial      Non-Financial      (Fair       (Amortized     (Amortized       Financial                      

Financial Margin & (Fair December 31,

                          Sovereign    Institutions     Institutions       Value)        Cost)           Cost)       Institutions      Sovereign     Institutions     Collateral      Value)        2011 (1)  Greece                   $        -    $          -    $            -    $       -    $         -    $          -    $          -       $       -     $         -    $         -    $       -    $           - Ireland                           -               -             130.7        130.7          122.1               -             0.5               -               -              -          0.5            131.2 Italy                             -               -             179.8        179.8          176.0               -               -               -               -              -            -            179.8 Portugal                          -               -               4.2          4.2            4.0               -               -               -               -              -            -              4.2 Spain                             -               -             139.8        139.8          134.2               -               -               -               -              -            -            139.8 Total Peripheral Europe                   $        -    $          -    $        454.5    $   454.5$     436.3    $          -    $        0.5       $       -     $         -    $         -    $     0.5    $       455.0  France                            -            48.4             209.9        258.3          255.7               -           290.5               -             0.1          275.3         15.3            273.6 Germany                           -             7.9             206.4        214.3          198.5               -             7.6               -             0.1            3.9          3.8            218.1 Netherlands                       -            48.8             295.6        344.4          315.7           658.2               -               -               -              -            -          1,002.6 Switzerland                       -            20.3             201.8        222.1          209.1               -           104.1               -             0.6           94.0         10.7            232.8 United Kingdom                    -            47.6             676.3        723.9          696.7               -            63.8               -             0.2           56.5          7.5            731.4 Other non-peripheral (2)                            78.7            33.5             483.6        595.8          566.9               -               -               -             0.4              -          0.4            596.2 Total Non-Peripheral Europe                         78.7           206.5           2,073.6      2,358.8        2,242.6           658.2           466.0               -             1.4          429.7         37.7          3,054.7 Total                    $     78.7    $      206.5    $      2,528.1    $ 2,813.3$   2,678.9    $      658.2    $      466.5       $       -     $       1.4    $     429.7$    38.2$     3,509.7

(1) Represents summation of: (i) total Fixed maturity and equity securities at fair value; (ii) Loan and receivables sovereign at amortized cost; and (iii) Derivative assets at fair value.

    (2) Other non-peripheral countires include: Austria, Belgium, Croatia, Denmark, , Hungary, Iceland, Kazakhstan, Latvia, Lithuania, Luxembourg, Norway, Russian Federation, Sweden, and Turkey.                                           95  --------------------------------------------------------------------------------

Liquidity and Capital Resources

Liquidity is the ability of the Company to generate sufficient cash flows to meet the cash requirements of operating, investing, and financing activities.

    Liquidity Management    The Company's principal available sources of liquidity are annuity product charges, GIC and fixed annuity deposits, investment income, proceeds from the maturity and sale of investments, proceeds from debt issuance and borrowing facilities, repurchase agreements, securities lending, reinsurance, and capital contributions.  Primary uses of these funds are payments of commissions and operating expenses, interest and premium credits, payments under guaranteed death and living benefits, investment purchases, repayment of debt, and contract maturities, withdrawals, and surrenders.    The Company's liquidity position is managed by maintaining adequate levels of liquid assets, such as cash, cash equivalents, and short-term investments.  As part of the liquidity management process, different scenarios are modeled to determine whether existing assets are adequate to meet projected cash flows. Key variables in the modeling process include interest rates, equity market movements, quantity and type of interest and equity market hedges, anticipated contract owner behavior, market value of general account assets, variable separate account performance, and implications of rating agency actions.    The fixed account liabilities are supported by a general account portfolio, principally composed of fixed rate investments with matching duration characteristics that can generate predictable, steady rates of return.  The portfolio management strategy for the fixed account considers the assets available-for-sale.  This strategy enables the Company to respond to changes in market interest rates, prepayment risk, relative values of asset sectors and individual securities and loans, credit quality outlook, and other relevant factors.  The objective of portfolio management is to maximize returns, taking into account interest rate and credit risk, as well as other risks. The Company's asset/liability management discipline includes strategies to minimize exposure to loss as interest rates and economic and market conditions change. In executing this strategy, the Company uses derivative instruments to manage these risks.  The Company's derivative counterparties are of high credit quality.                                           96 

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Liquidity and Capital Resources

    Additional sources of liquidity include borrowing facilities to meet short-term cash requirements that arise in the ordinary course of business.  The Company maintains the following agreements:    †    A reciprocal loan agreement with ING America Insurance Holdings, Inc. ("ING AIH"), an affiliate, whereby either party can borrow from the other up to 3.0% of the Company's statutory net admitted assets, excluding Separate Accounts, as of the preceding December 31. At December 31, 2011 and 2010, the Company had an outstanding receivable of $535.9 and $593.6, respectively, with ING AIH under the reciprocal loan agreement.  †    The Company holds approximately 43.0% of its assets in marketable securities.  These assets include cash, U.S. Treasuries, Agencies and Public, Corporate Bonds, ABS, CMBS, CMO and Equity securities.  In the event of a temporary liquidity need, cash may be raised by entering into reverse repurchase, dollar rolls, and/or security lending agreements by temporarily lending securities and receiving cash collateral.  Under the Company's Liquidity Plan, up to 12% of the Company's general account statutory admitted assets may be allocated to repurchase, securities lending and dollar roll programs.  At the time a temporary cash need arises, the actual percentage of admitted assets available for reverse repurchase transactions will depend upon outstanding allocations to the three programs.  As of December 31, 2011, the Company had securities lending obligations of $524.3, which represents less than 0.8% of the Company's general account statutory admitted assets.    The Company is a member of the FHLB and is required to maintain a collateral deposit that backs funding agreements issued to the FHLB.  As of December 31, 2011 and 2010, the Company had $1,579.6 in non-putable funding agreements, including accrued interest, issued to FHLB. As of December 31, 2011 and 2010, assets with a market value of approximately $1,897.7 and $1,930.1, respectively, collateralized the funding agreements issued to the FHLB.  Assets pledged to the FHLB are included in Fixed maturities, available-for-sale, on the Balance Sheets.    

Management believes that its sources of liquidity are adequate to meet the Company's short-term cash obligations.

   Funding Agreements    On August 10, 2007, the Company issued an extendable funding agreement to its parent, Lion, upon receipt of a single deposit in the amount of $500.0.  To fund the purchase of the funding agreement, Lion issued a promissory note to its indirect parent company, ING Verzekeringen N.V. ("ING V"), which has been guaranteed by Lion's immediate parent, ING AIH.  The funding agreement was scheduled to mature on August 10, 2012, however it was terminated on September 14, 2011, with an early termination fee paid to the Company of $3.2.                                           97 

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Capital Contributions and Dividends

During the year ended December 31, 2011 and 2010, the Company received $44.0 and $749.0, respectively, in capital contributions from its Parent.

During 2011 and 2010, the Company did not pay any dividends or return of capital distributions to its Parent.

Transfer of Alt-A RMBS Participation Interest and Related Loan to Dutch State

    In the first quarter of 2009, ING reached an agreement, for itself and on behalf of certain ING affiliates including the Company, with the Dutch State on the Back-Up Facility covering 80% of ING's Alt-A RMBS.  Under the terms of the Back-Up Facility, a full credit risk transfer to the Dutch State was realized on 80% of ING's Alt-A RMBS owned by ING Bank, FSB and ING affiliates within ING U.S. insurance with a book value of $36.0 billion, including book value of $1.4 billion of the Alt-A RMBS portfolio owned by the Company (with respect to the Company's portfolio, the "Designated Securities Portfolio") (the "ING-Dutch State Transaction").  As a result of the risk transfer, the Dutch State participates in 80% of any results of the ING Alt-A RMBS portfolio.  The risk transfer to the Dutch State took place at a discount of approximately 10% of par value.  In addition, under the Back-Up Facility, other fees were paid both by the Company and the Dutch State.  Each ING company participating in the ING-Dutch State Transaction, including the Company remains the legal owner of 100% of its Alt-A RMBS portfolio and will remain exposed to 20% of any results on the portfolio.  The ING-Dutch State Transaction closed on March 31, 2009, with the affiliate participation conveyance and risk transfer to the Dutch State described in the succeeding paragraph taking effect as of January 26, 2009.    In order to implement that portion of the ING-Dutch State Transaction related to the Company's Designated Securities Portfolio, the Company entered into a participation agreement with its affiliates, ING Support Holding and ING pursuant to which the Company conveyed to ING Support Holding an 80% participation interest in its Designated Securities Portfolio and will pay a periodic transaction fee, and received, as consideration for the participation, an assignment by ING Support Holding of its right to receive payments from the Dutch State under the Illiquid Assets Back-Up Facility related to the Company's Designated Securities Portfolio among, ING, ING Support Holding and the Dutch State (the "Company Back-Up Facility").  Under the Company Back-Up Facility, the Dutch State is obligated to pay certain periodic fees and make certain periodic payments with respect to the Company's Designated Securities Portfolio, and ING Support Holding is obligated to pay a periodic guarantee fee and make periodic payments to the Dutch State equal to the distributions made with respect to the 80% participation interest in the Company's Designated Securities Portfolio. The Dutch-State payment obligation to the Company under the Company Back-Up Facility is accounted for as a loan receivable for U.S. GAAP and is reported in Loan-Dutch State obligation on the Balance Sheets.    

Upon the closing of the transaction on March 31, 2009, the Company reduced the unrealized loss balance in Accumulated other comprehensive loss included in

                                       98  --------------------------------------------------------------------------------

Shareholder's equity by $411.3 and recognized a gain of $117.6, which was reported in Net realized capital losses on the Statements of Operations.

    In a second transaction, known as the Step 1 Cash Transfer, a portion of the Company's Alt-A RMBS which had a book value of $18.9 was sold for cash to an affiliate, Lion II.  Immediately thereafter, Lion II sold to ING Direct Bancorp the purchased securities (the "Step 2 Cash Transfer"). Contemporaneous with the Step 2 Cash Transfer, ING Direct Bancorp included such purchased securities as part of its Alt-A RMBS portfolio sale to the Dutch State.  The Step 1 Cash Transfer closed on March 31, 2009, and the Company recognized a gain of $7.9 contemporaneous with the closing of the ING-Dutch State Transaction, which was reported in Net realized capital losses on the Statements of Operations.    As part of the final Restructuring Plan submitted to the EC in connection with its review of the Dutch state aid to ING, ING has agreed to make additional payments to the Dutch State corresponding to an adjustment of fees for the Back-Up Facility. Under this new agreement, the terms of the ING-Dutch State Transaction which closed on March 31, 2009, including the transfer price of the Alt-A RMBS securities, remain unaltered and the additional payments are not borne by the Company or any other ING U.S. subsidiaries. For a description of the key components of the Restructuring Plan, see the "Recent Initiatives" section included in Liquidity and Capital Resources in Part II, Item 7. contained herein.    Collateral    Under the terms of the Company's Over-The-Counter Derivative International Swaps and Derivatives Association, Inc. Agreements ("ISDA Agreements"), the Company may receive from, or deliver to, counterparties, collateral to assure that all terms of the ISDA Agreements will be met with regard to the Credit Support Annex ("CSA").  The terms of the CSA call for the Company to pay interest on any cash received equal to the Federal Funds rate.  As of December 31, 2011 and 2010, the Company held $821.2 and $57.9, respectively, of cash collateral, which was included in Payables under securities loan agreement, including collateral held, on the Balance Sheets. In addition, as of December 31, 2011 and 2010, the Company delivered collateral of $779.8 and $749.7, respectively, in fixed maturities pledged under derivatives contracts, which was included in Securities pledged on the Balance Sheets.    Reinsurance Agreements    Reinsurance Ceded   

Waiver of Premium - Coinsurance Funds Withheld

    Effective October 1, 2010, the Company entered into a coinsurance funds withheld agreement with its affiliate, Security Life of Denver International Limited ("SLDI").  Under the terms of the agreement, the Company ceded to SLDI 100% of the group life waiver of premium liability (except for groups covered under rate credit agreements) assumed from ReliaStar Life Insurance Company ("RLI"), an affiliate,                                           99 

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related to the Group Annual Term Coinsurance Funds Withheld agreement between the Company and RLI.

Upon inception of the agreement, the Company paid SLDI a premium of $245.6.

At

 the same time, the Company established a funds withheld liability for $188.5 to SLDI and SLDI purchased a $65.0 letter of credit to support the ceded Statutory reserves of $245.6.  In addition, the Company recognized a gain of $17.9 based on the difference between the premium paid and the ceded U.S. GAAP reserves of $227.7, which offsets the $57.1 ceding allowance paid by SLDI.  The ceding allowance will be amortized over the life of the business.    

As of December 31, 2011 and 2010, the value of the funds withheld liability under this agreement was $190.7 and $191.3, which is included in Other liabilities on the Balance Sheets.

Group Term Life - Monthly Renewable Term

    Effective June 30, 2009, the Company entered into a monthly renewable term ("MRT") reinsurance agreement with Canada Life Assurance Company ("Canada Life"), an unaffiliated Canadian insurance company. Under the terms of the agreement, the Company ceded 90% of its net retained in-force block of group term life business and any new group term life business assumed from RLI, an affiliate, to Canada Life. The coinsurance agreement is accounted for using the deposit method. Effective October 1, 2010, the treaty was amended to discontinue ceding the group life waiver of premium business.    

Guaranteed Living Benefit - Coinsurance and Coinsurance Funds Withheld

    Effective June 30, 2008, the Company entered into an automatic reinsurance agreement with its affiliate, SLDI, covering 100% of the benefits guaranteed under specific variable annuity guaranteed living benefit riders attached to certain variable annuity contracts issued by the Company on or after January 1, 2000.    Also effective June 30, 2008, the Company entered into a services agreement with SLDI, under which the Company provides certain actuarial risk modeling consulting services to SLDI with respect to hedge positions undertaken by SLDI in connection with the reinsurance agreement.  For the years ended December 31, 2011 and 2010, revenue related to the agreement was $12.4 and $11.9, respectively.    Effective July 1, 2009, the reinsurance agreement was amended and restated to change the reinsurance basis from coinsurance to a combined coinsurance and coinsurance funds withheld basis. On July 31, 2009, SLDI transferred assets with a market value of $3.2 billion to the Company, and the Company deposited those assets into a funds withheld trust account.  As of December 31, 2011, the assets on deposit in the trust account increased to $5.3 billion.  The Company also established a corresponding funds withheld liability to SLDI, which is included in Other liabilities on the Balance Sheets.                                          100  --------------------------------------------------------------------------------

Also effective July 1, 2009, the Company and SLDI entered into an asset management services agreement, under which SLDI serves as asset manager for the funds withheld account. SLDI has retained its affiliate, ING Investment Management LLC, as subadviser for the funds withheld account.

Effective October 1, 2011, the Company and SLDI entered into an amended and restated automatic reinsurance agreement of the existing 2009 amended and restated reinsurance agreement in order to provide more flexibility to the Company and SLDI with respect to the collateralization of the reserves related to the variable annuity guaranteed living benefits reinsured under the agreement.

    At December 31, 2011 and 2010, the value of reserves ceded by the Company under this agreement was $1.9 billion and $1.0 billion, respectively.  In addition, a deferred loss in the amount of $356.4 and $355.9 at December 31, 2011 and 2010, respectively, is included in Other assets on the Balance Sheets and is amortized over the period of benefit.   

Multi-year Guaranteed Fixed Annuity - Coinsurance

    Effective May 1, 2005, the Company entered into a coinsurance agreement with its affiliate, Security Life of Denver Insurance Company ("SLD"). Under the terms of the agreement, SLD assumed and accepted the responsibility for paying, when due, 100% of the liabilities arising under the multi-year guaranteed fixed annuity contracts issued by the Company between January 1, 2001 and December 31, 2003. In addition, the Company assigned to SLD all future premiums received by the Company attributable to the ceded contracts.    Under the terms of the agreement, the Company ceded $2.5 billion in account balances and transferred a ceding commission and $2.7 billion in assets to SLD, resulting in a realized capital gain of $47.9 to the Company, which reduced the ceding commission.    The coinsurance agreement is accounted for using the deposit method.  As such, $2.7 billion of Deposit receivable from affiliate was established on the Balance Sheets.  The receivable will be adjusted over the life of the agreement based on cash settlements and the experience of the contracts, as well as for amortization of the ceding commission.  The Company incurred amortization expense of the negative ceding commission of $7.2, $21.4, and $17.9, for the years ended December 31, 2011, 2010, and 2009, respectively, which is recorded in Other expenses in the Statements of Operations.    Universal Life - Coinsurance    Effective January 1, 2000, the Company entered into a 100% coinsurance agreement with its affiliate, SLD, covering certain universal life policies which had been issued and in force as of, as well as any such policies issued after, the effective date of the agreement.  As of December 31, 2011 and 2010, the value of reserves ceded by the Company under this agreement was $18.7 and $18.1, respectively.                                          101 

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Guaranteed Investment Contract - Coinsurance

    Effective August 20, 1999, the Company entered into a Facultative Coinsurance Agreement with its affiliate, SLD.  Under the terms of the agreement, the Company facultatively cedes to SLD, from time to time, certain GICs on a 100% coinsurance basis.  The Company utilizes this reinsurance facility primarily for diversification and asset-liability management purposes in connection with this business, which is facilitated by the fact that SLD is also a major GIC issuer. Senior management of the Company has established a current maximum of $4.0 billion for GIC reserves ceded under this agreement.    

The value of GIC reserves ceded by the Company under this agreement was $121.4 and $40.0 at December 31, 2011 and 2010, respectively.

   Reinsurance Assumed   

Level Premium Term Life Insurance - Stop-loss

    Effective October 1, 2010, the Company entered into a stop-loss agreement with its affiliate, RLI under which the Company agreed to indemnify and reinsure RLI for the aggregate mortality risk under certain level premium term life insurance policies issued by RLI between January 1, 2009 and December 31, 2009 and certain level premium term life insurance policies assumed by RLI from ReliaStar Life Insurance Company of New York under an Automatic Coinsurance Agreement effective March 1, 2008.  Under the terms of the agreement, the Company will make benefit payments to RLI equal to the amount of claims in excess of the attachment point (equal to a percentage of net reinsurance premium) up to the maximum fully covered benefit.    There was no initial consideration received by the Company from RLI under this agreement.  The Company receives monthly premiums, net of benefit payments, based on premium rates set forth in the respective agreements.  As such, there is no unearned reinsurance premium.    

The stop-loss agreement is accounted for using the deposit method. A fee receivable from affiliate of $0.9 is included in Future policy benefits and claims reserves on the Balance Sheets. The fee is accrued for and subsequently settled in cash each quarterly accounting period.

Individual Life - Yearly Renewable Term

    Effective December 1, 2008 and December 31, 2008, respectively, the Company entered into two yearly renewable term reinsurance agreements with its affiliate, RLI, for an indefinite duration.  Under the terms of the agreements, the Company assumed 100% of RLI's mortality risk associated with the net amount at risk under specific life insurance policies, including:    †               Individual life policies issued by RLI and previously 

assumed by RLI from ReliaStar Life Insurance Company of New York ("RLNY"), with policy dates

                                          102  --------------------------------------------------------------------------------

prior to January 1, 2000, including certain term life, universal life, variable universal life, and whole life, insurance policies.

  †               In force individual life policies issued by RLI, where 

premiums

are paid on the insured's behalf through payroll deduction and which were marketed by employee benefit brokers.

    The Company received initial consideration of $3.9 from RLI.  Thereafter, the Company receives monthly premiums, net of benefit payments, based on premium rates set forth in the respective agreements.  As such, there is no unearned reinsurance premium.   

As of December 31, 2011 and 2010, the value of the reserves assumed by the Company under these agreements was $9.4 and $9.6, respectively.

Group Annual Term - Coinsurance Funds Withheld

    Effective December 31, 2008, the Company entered into a coinsurance funds withheld agreement with RLI for an indefinite duration.  Under the terms of the agreement, the Company assumed 100% quota share of RLI's net retained liability under certain Employee Benefits Group Annual Term policies, including disability waiver of premium.    The initial premium of $219.9 was equal to the aggregate reserve assumed by the Company.  Thereafter, premiums are equal to the total earned gross premiums collected by RLI from policyholders.  RLI will retain all reinsurance premiums payable to the Company as funds withheld, as security for ceded liabilities and against which ceded losses will be offset.  Monthly, the Company will receive or pay a net settlement.  This agreement was amended October 1, 2010 to better reflect the current investment environment and to modify the treatment of claims under certain policies under which claims are not paid in the form of a single lump sum; the underlying terms described above remained unchanged.  (Please see also description of Waiver of Premium - Coinsurance Funds Withheld Agreement between the Company and SLDI under "Reinsurance Ceded" above).    

As of December 31, 2011 and 2010, the value of the reserves assumed by the Company under this agreement was $453.1 and $465.5, respectively.

   Group Life - Funds Withheld    Effective December 31, 2008, the Company entered into a funds withheld agreement with RLI pursuant to which the Company assumed 100% quota share of RLI's net retained liability under assumed group life reinsurance in-force. Effective January 1, 2010 and as a result of the sale of ING's U.S. Group Reinsurance business to Reinsurance Group of America, this agreement was terminated.    The initial premium of $60.0 for this agreement was equal to the net Statutory reserve assumed by the Company.  Thereafter, premiums were equal to the total earned reinsurance premiums collected by RLI, less a ceding commission.  RLI retained all reinsurance premiums payable to the Company as funds withheld, as security for                                          103 

--------------------------------------------------------------------------------    ceded liabilities and against which ceded losses were offset.  Net settlements were made on a monthly basis.  In addition, the Company provided reserve credit (in the excess of the funds withheld balance) to RLI through either a cash deposit or letter of credit.  As of December 31, 2011 and 2010, the Company did not have any reserves assumed under this agreement.    Separate Accounts    Separate account assets and liabilities generally represent funds maintained to meet specific investment objectives of contract owners who bear the investment risk, subject, in limited cases, to certain minimum guarantees.  Investment income and investment gains and losses generally accrue directly to such contract owners.  The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company or its affiliates.    Separate account assets supporting variable options under variable annuity contracts are invested, as designated by the contract owner or participant (who bears the investment risk subject, in limited cases, to minimum guaranteed rates) under a contract, in shares of mutual funds that are managed by the Company or its affiliates, or in other selected mutual funds not managed by the Company or its affiliates.    Variable annuity deposits are allocated to various subaccounts established within the separate account.  Each subaccount represents a different investment option into which the contract owner may allocate premiums.  The account value of a variable annuity contract is equal to the aggregate value of the subaccounts selected by the contract owner (including the value allocated to any fixed account), less fees and expenses.  The Company offers investment options for its variable annuity contracts covering a wide range of investment styles, including large, mid, and small cap equity funds, as well as fixed income alternatives.  Therefore, unlike fixed annuities, under variable annuity contracts, contract owners bear the risk of investment gains and losses associated with the selected investment allocation.  While the Company ceased new sales of its variable annuity products in March 2010, its existing variable annuity block of business contains certain guaranteed death and living benefits (described below) under which it bears specific risks associated with these benefits.  Many of the variable annuity contracts issued by the Company are combination contracts offering both variable and fixed options under which some or all of the deposits may be allocated by the contract owner to a fixed account available under the contract.    The Company's major source of income from variable annuities is the base contract mortality fees, expense fees, and guaranteed death and living benefit rider fees charged to the contract owner, less the cost of administering the product, as well as the cost of providing for the guaranteed death and living benefits.                                          104 

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   Ratings   

The Company's access to funding and its related cost of borrowing, requirements for derivatives collateral posting and the attractiveness of certain of its products to customers are affected by Company credit ratings and insurance financial strength ratings, which are periodically reviewed by the rating agencies.

On December 7, 2011, Moody's downgraded the insurance financial strength rating of the Company to "A3" from "A2" and revised the outlook to Stable from Negative.

    On March 7, 2012, S&P affirmed the counterparty credit and insurance financial strength rating of the Company at "A-" and revised the outlook to Stable from Watch Negative. On December 8, 2011, S&P downgraded the counterparty credit and insurance financial strength rating of the Company to "A-" from "A" and revised the outlook to Watch Negative from Stable. On November 17, 2011, S&P affirmed the "A" rating of the Company and revised the outlook to Stable from Negative based on de-risking and improving business fundamentals.    

On August 19, 2011, Fitch Ratings Ltd. ("Fitch") revised the Company's Rating Watch status to Evolving from Negative.

    On December 14, 2011, A.M. Best affirmed the insurance financial strength rating of the Company at "A", downgraded the issuer credit rating to "a" from "a+" and revised the outlook to Ratings Under Review with Negative Implications from Stable.  On June 16, 2011, A.M. Best affirmed the Company's insurance financial strength rating of "A" and the issuer credit rating of "a+".    The ratings of the Company by S&P, Fitch, A.M. Best and Moody's reflect a broader view of how the financial services industry is being challenged by the current economic environment, but also are based on the rating agencies' specific views of the Company's financial strength.  In making their ratings decisions, the agencies consider past and expected future capital and earnings, asset quality and risk, profitability and risk of existing liabilities and current products, market share and product distribution capabilities, and direct or implied support from parent companies, including implications of the ING restructuring plan, among other factors. The ratings actions, affirmations and outlook changes by S&P, Moody's, and A.M. Best in December 2011 followed the fourth quarter 2011 announcements by ING regarding a charge of EUR 0.9 to EUR 1.1 billion against fourth quarter results of the U.S. Closed Block Variable Annuity business.    Minimum Guarantees    Variable annuity contracts containing minimum guaranteed death and living benefits expose the Company to equity risk.  A decrease in the equity markets may cause a decrease in the account values, thereby increasing the possibility that the Company may be required to pay amounts to contract owners due to guaranteed death and                                          105 

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living benefits. An increase in the value of the equity markets may increase account values for these contracts, thereby decreasing the Company's risk associated with guaranteed death and living benefits.

The Company ceased new sales of variable annuity products in March 2010. However, the Company's existing variable annuity block of business contains certain guaranteed death and living benefits made available to contract owners as described below:

Guaranteed Minimum Death Benefits ("GMDBs"):

    †               Standard - Guarantees that, upon death, the death benefit 

will

be no less than the premiums paid by the contract owner, adjusted for any contract withdrawals.

  †               Ratchet - Guarantees that, upon death, the death benefit will be no less than the greater of (1) Standard or (2) the maximum contract anniversary (or quarterly) value of the variable annuity, adjusted for contract withdrawals.  †               Combo (Max 7) - Guarantees that, upon death, the death 

benefit

 will be no less than the greater of (1) Ratchet or (2) Rollup (Rollup guarantees that, upon death, the death benefit will be no less than the aggregate premiums paid by the contract owner accruing interest at the contractual rate per annum, adjusted for contract withdrawals, which may be subject to a maximum cap on the rolled up amount.)    A number of other versions of death benefits were offered previously but sales were discontinued.  For contracts issued prior to January 1, 2000, most contracts with enhanced death benefit guarantees were reinsured to third party reinsurers to mitigate the risk produced by such guaranteed death benefits. 

For

contracts issued after December 31, 1999, the Company instituted a variable annuity guarantee hedging program in lieu of reinsurance. The variable annuity guarantee hedging program is based on the Company entering into derivative positions to offset exposures to guaranteed minimum death benefits due to adverse changes in the equity markets.

As of December 31, 2011 and 2010, the guaranteed value of these death benefits in excess of account values was estimated to be as follows:

                                                  (in billions)              2011 Net amount at risk, before reinsurance      $           9.6 Net amount at risk, net of reinsurance                  8.7                2010 Net amount at risk, before reinsurance      $           7.9 Net amount at risk, net of reinsurance                  6.9     The increase in the guaranteed value of these death benefits was primarily driven by the rollup provisions on the GMDB's. The guaranteed value of GMDB's in excess of account values, net of reinsurance, was projected to be covered by the Company's variable annuity guarantee hedging program.                                          106  --------------------------------------------------------------------------------    The separate account liabilities subject to the requirements for additional reserve liabilities under ASC Topic 944 for minimum guaranteed benefits, and the additional liabilities recognized related to GMDB's, as of December 31, 2011 and 2010, were as follows:             2011 Separate account liability      $ 39,356.9 Additional liability balance         510.3           2010 Separate account liability      $ 44,413.3 Additional liability balance         373.9       As of December 31, 2011 and 2010, the above additional liability recorded by the Company, net of reinsurance, represented the estimated net present value of the Company's future obligation for guaranteed minimum death benefits in excess of account values.  The liability increased mainly due to an increase in expected future claims attributable to a combination of movement in equity markets during 2011 and refinements to best estimate assumptions.    Guaranteed Living Benefits:    †               Guaranteed Minimum Income Benefit ("GMIB") - Guarantees a 

minimum income payout, exercisable each contract anniversary on or after a specified date, in most cases the 10th rider anniversary.

  †               Guaranteed Minimum Withdrawal Benefit ("GMWB") - Guarantees an annual withdrawal amount for life that is calculated as a percentage of the notional amount that equals premium at the time of contract issue and may increase by annual ratchets.  The percentage used to determine the guaranteed annual withdrawal amount may vary by age and contract year of first withdrawal. Earlier versions of the withdrawal benefit included a rollup (7%, 6%, 5% or 0%, depending on versions of the benefit) in combination with a ratchet (primarily annual or quarterly, depending on versions). A joint life-time withdrawal benefit option was available to include coverage for spouses.  Most versions of the withdrawal benefit included reset and/or step-up features that may increase the guaranteed withdrawal amount in certain conditions.  Earlier versions of the withdrawal benefit guarantee that annual withdrawals of up to 7.0% of eligible premiums may be made until eligible premiums previously paid by the contract owner are returned, regardless of account value performance.  Asset allocation requirements apply at all times where withdrawals are guaranteed for life.  †               Guaranteed Minimum Accumulation Benefit ("GMAB") - 

Guarantees

 that the account value will be at least 100% of the eligible premiums paid by the contract owner after 10 years, net of any contract withdrawals (GMAB 10). In the past, the Company offered an alternative design that guaranteed the account value to be at least 200% of the eligible premiums paid by contract owners after 20 years (GMAB 20).                                          107  --------------------------------------------------------------------------------    The Company reinsured most of its living benefit guarantee riders to SLDI, an affiliated reinsurer, to mitigate the risk produced by such benefits.  This reinsurance agreement covers all of the GMIBs, as well as the GMWBs with lifetime guarantees ("the "Reinsured living benefits").  The GMABs and the GMWBs without lifetime guarantees (the "Non-reinsured living benefits") are not covered by this reinsurance. The Non-reinsured living benefits are still covered by the Company's variable annuity guarantee hedging program.    The following guaranteed living benefits information is as of December 31, 2011 and 2010:                                                  Non-reinsured         Reinsured                                              Living Benefits     Living Benefits                                                (GMAB/GMWB)        (GMIB/GMWBL)              2011 Net amount at risk, before reinsurance     $           63.2    $       

5,692.0

 Net amount at risk, net of reinsurance                 63.2                 -               2010 Net amount at risk, before reinsurance     $           52.4    $       

2,016.8

 Net amount at risk, net of reinsurance                 52.4                 -       The net amount at risk for the Reinsured living benefits is equal to the excess of the present value of the minimum guaranteed annuity payments available to the contractholder over the current account value. During fourth quarter 2011, the Company revised the methodology used to calculate the net amount at risk to better reflect the nature of the underlying living benefits and to more closely align our methodology with peers. The current methodology partially reflects the current interest rate environment and also includes a provision for the expected mortality of the clients covered by these living benefits.  The values for the Reinsured living benefits in the above table are presented under the new methodology as of December 31, 2011 and 2010. The increase in the net amount at risk of these living benefits from $2.0 billion to $5.7 billion was primarily driven by changes in the interest rate environment during 2011, combined with rollup provisions on the Reinsured living benefits.    The net amount at risk for the Non-reinsured living benefits is equal to the guaranteed value of these benefits in excess of the account values, which is reflected in the table above.                                          108 

--------------------------------------------------------------------------------    The separate account liabilities subject to the requirements for additional reserve liabilities under ASC Topic 944 for minimum guaranteed benefits, and the additional liabilities recognized related to minimum guarantees, by type, as of December 31, 2011 and 2010, were as follows:                                       Non-reinsured         Reinsured                                   Living Benefits     Living Benefits                                     (GMAB/GMWB)        (GMIB/GMWBL)          2011 Separate account liability      $        1,105.9    $            - Additional liability balance               114.9                 -           2010 Separate account liability      $        1,442.6    $            - Additional liability balance                77.0                 -       As of December 31, 2011 and 2010, the above additional liabilities recorded by the Company, net of reinsurance, represented the estimated net present value of its future obligations for these benefits.    Variable Annuity Guarantee Hedging Program:  In order to hedge equity risk associated with non-reinsured GMDBs and non-reinsured guaranteed living benefits, the Company enters into futures positions and total return swaps on various public market equity indices chosen to closely replicate contract owner variable fund returns.  The Company also hedges most of the foreign currency risk arising from its international fund exposure using forward contracts. The Company uses market consistent valuation techniques to establish its derivative positions and to rebalance the derivative positions in response to market fluctuations. The Company also administers a hedging program that mitigates not only equity risk, but also the interest rate risk associated with its Principal Guard GMWB and GMAB products.  This hedge strategy primarily involves entering into interest rate swaps.    The Variable Annuity Funding Capital Hedging Program, which was approved during 2010, is an overlay to the Variable Annuity Guarantee Hedging Program that mitigates the impact of potential declines in equity markets and their impact on statutory capital. The program's hedge strategy primarily involves using equity futures contracts.  The derivatives under the variable annuity guarantee hedging programs do not qualify for hedge accounting under U.S. GAAP.                                          109  --------------------------------------------------------------------------------    Other risks posed by market conditions, such as the Company's volatility risk, and risks posed by contract owner experience, such as surrender and mortality experience deviations, while measured and modeled, are not explicitly mitigated by this program.  The Company continues to review its hedging strategies, and may from time to time make revisions to the hedging program.    During December 2010, the Company entered into a series of interest rate swaps with external counterparties.  The Company also entered into a short-term mirror total return swap ("TRS") transaction with ING Verzekeringen N.V. ("ING V"), its indirect parent company.  The outstanding market value of the TRS was $11.6 at December 31, 2010.  The TRS matured January 3, 2011.    For those risks addressed by the variable annuity guarantee hedging program, the Company is exposed to the risk that the market indices will not adequately replicate actual contract owner variable fund growth.  Any differences between actual results and the market indices result in income volatility.    Fixed Indexed Annuities    The crediting mechanism for FIAs exposes the Company to changes in the equity market ("S&P 500").  Under these contracts, the Company credits interest to the contract owner accounts at the greater of a fixed interest rate or a rate based upon performance of a specified equity index.  The Company bears the investment risk as the Company credits contract owner accounts with a stated interest rate, but cannot be certain that the investment income earned on the general account assets will exceed that rate.  For accounting purposes, the equity return component of the FIA is considered an embedded derivative.  See Critical Accounting Policies, Judgments, and Estimates "Reserves" for further discussion.    S&P 500 call options are purchased and written to hedge equity risk associated with the FIA contracts.  The Company also uses futures contracts to hedge certain FIA contracts.  The FIA hedging program is limited to currently accruing liabilities resulting from participation rates, that have already been set, and measured using capital market valuation techniques.  Future equity returns, which may be reflected in FIA credited rates beyond the current policy term, are not hedged.    Other Insurance Products    Historically, the Company provided interest-sensitive, traditional life insurance, and health insurance products.  All health insurance has been ceded to other insurers and new policies are no longer written.  The Company ceased the issuance of life insurance policies in 2001, and all life insurance business is currently in run-off.  A certain portion of the assets held in the general account are dedicated to funding this block of business.                                          110  --------------------------------------------------------------------------------

     Derivatives    The Company's use of derivatives is limited mainly to hedging purposes to reduce the Company's exposure to cash flow variability of assets and liabilities, interest rate risk, credit risk, exchange rate risks, and market risk. It is the Company's policy not to offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral arising from derivative instruments recognized at fair value executed with the same counterparty under a master netting arrangement.    The Company enters into interest rate, equity market, credit default, and currency contracts, including swaps, caps, floors, options and futures, to reduce and manage risks associated with changes in value, yield, price, cash flow, or exchange rates of assets or liabilities held or intended to be held, or to assume or reduce credit exposure associated with a referenced asset, index, or pool.  The Company also utilizes options and futures on equity indices to reduce and manage risks associated with its annuity products.  Open derivative contracts are reported as either Derivatives or Other liabilities, as appropriate, on the Balance Sheets.  Changes in the fair value of such derivatives are recorded in Net realized capital gains (losses) in the Statements of Operations.    If the Company's current debt and claims paying ratings were downgraded in the future, the terms in the Company's derivative agreements may be triggered, which could negatively impact overall liquidity. For the majority of the Company's counterparties, there is a termination event should the Company's long-term debt ratings drop below BBB+/Baal.    The Company also has investments in certain fixed maturity instruments, and has issued certain retail annuity products, that contain embedded derivatives whose market value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short-term or long-term), exchange rates, prepayment rates, equity markets, or credit ratings/spreads.    

Embedded derivatives within retail annuity products are included in Future policy benefits and claims reserves on the Balance Sheets, and changes in the fair value are recorded in Interest credited and other benefits to contract owners in the Statements of Operations.

    In addition, the Company has entered into two coinsurance with funds withheld arrangements which contains an embedded derivative whose fair value is based on the change in the fair value of the underlying assets held in trust.  The embedded derivative within the coinsurance funds withheld arrangement is included in Funds held under reinsurance treaties with affiliates on the Balance Sheets, and changes in the fair value are recorded in Interest credited and other benefits to contract owners in the Statements of Operations.                                          111  --------------------------------------------------------------------------------

Deposits and Reinsurance Recoverable

    The Company utilizes reinsurance agreements to reduce its exposure to large losses in most aspects of its insurance business.  Such reinsurance permits recovery of a portion of losses from reinsurers, although it does not discharge the primary liability of the Company as direct insurer of the risks reinsured. The Company evaluates the financial strength of potential reinsurers and continually monitors the financial condition of reinsurers. Only those reinsurance recoverable balances deemed probable of recovery are reflected as assets on the Company's Balance Sheets.    

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

    Through the normal course of investment operations, the Company commits to either purchase or sell securities, commercial mortgage loans, or money market instruments, at a specified future date and at a specified price or yield.  The inability of counterparties to honor these commitments may result in either a higher or lower replacement cost.  Also, there is likely to be a change in the value of the securities underlying the commitments.    

As of December 31, 2011 and 2010, the Company had off-balance sheet commitments to purchase investments equal to their fair value of $255.3 and $529.2, respectively.

    The Company has entered into various credit default swaps. When credit default swaps are sold, the Company assumes credit exposure to certain assets that it does not own.  Credit default swaps may also be purchased to reduce credit exposure in the Company's portfolio.  Credit default swaps involve a transfer of credit risk from one party to another in exchange for periodic payments.  These instruments are typically written for a maturity period of five years and do not contain recourse provisions, which would enable the seller to recover from third parties.  The Company has ISDA agreements with each counterparty with which it conducts business and tracks the collateral position for each counterparty. 

To

 the extent cash collateral is received, it is included in Payables under securities loan agreement, including collateral held, on the Balance Sheets and is reinvested in short-term investments.  The source of non-cash collateral posted was investment grade bonds of the entity.  Collateral held is used in accordance with the Credit Support Annex ("CSA") to satisfy any obligations. Investment grade bonds owned by the Company are the source of noncash collateral posted, which is reported in Securities pledged on the Balance Sheets.  In the event of a default on the underlying credit exposure, the Company will either receive an additional payment (purchased credit protection) or will be required to make an additional payment (sold credit protection) equal to par minus recovery value of the swap contract.  At December 31, 2011, the fair value of credit default swaps of $0.9 and $14.1 was included in Derivatives and Other liabilities, respectively, on the Balance Sheets.  At December 31, 2010, the fair value of credit default swaps of $3.2 and $14.5 was included in Derivatives and Other liabilities, respectively, on the Balance Sheets.  As of December 2011 and 2010, the maximum potential future exposure to the Company on the sale of credit protection under credit default swaps was $108.8 and $308.1, respectively.                                          112 

--------------------------------------------------------------------------------

As of December 31, 2011, the Company had certain contractual obligations due over a period of time as summarized in the following table.

                                                    Payments Due by Period                                          Less than                                 More than Contractual Obligations      Total         1 Year      1-3 Years     3-5 Years      5 Years Purchase obligations(3)    $    255.3     $   255.3    $       -     $       -     $       - Reserves for insurance obligations(4)               83,038.1       9,388.1      14,811.9      12,716.9      46,121.2 Pension obligations(5)           16.2           1.5           3.2           3.2           8.3 Long-term debt obligations(1)                1,069.2          28.3          56.3          56.4         928.2 Operating lease obligations(2)                   35.1           7.0          13.3          11.7           3.1 Securities lending and repurchase agreements           248.3         248.3            -             -             - Total                      $ 84,662.2     $ 9,928.5    $ 14,884.7    $ 12,788.2    $ 47,060.8    

(1) Long-term debt, including interest, consists of the following:

    †   A surplus note in the principal amount of $35.0, and the         related interest payable with its affiliate, SLD.  As of         December 31, 2011, the outstanding principal, interest rate,         and maturity date, of the surplus note were $35.0, 8.0%, and         December 7, 2029, respectively.     †   Surplus notes in the aggregate principal amount of $400.0         and the related interest payable, with its affiliates, ING         Life Insurance and Annuity Company, RLI and SLDI.  As of         December 31, 2011, the aggregate amount of outstanding         principal, interest rate, and maturity date, of these         surplus notes were $400.0, 6.3%, and December 29, 2034,         respectively.

(2) Operating lease obligations relate to the rental of office space

under various non-cancelable operating lease agreements, the

longest term of which expires in 2017, and the anticipated fees

from the abandonment and disposition of leased property. (3) Purchase obligations consist primarily of outstanding

    commitments under limited partnerships that may occur any time     within the term of the partnership.  The exact timing of funding     these commitments, however, cannot be estimated.  Therefore, the     total amount of the commitments is included in the category     "Less than 1 Year." (4) Reserves for insurance obligations consist of amounts required     to meet the Company's future obligations for future policy     benefits and contract owner account balances. Amounts presented     in the table represent estimated cash payments under such     contracts, including significant assumptions related to the     receipt of future premiums, mortality, morbidity' lapse,     renewal, retirement, disability and annuitization comparable     with actual experience. These assumptions also include market     growth and interest crediting consistent with assumptions used     in amortizing deferred policy acquisition costs. All estimated

cash payments are undiscounted for the time value of money. (5) Pension obligations consist of actuarially-determined pension

    obligations, contribution matching obligations, and other     supplemental retirement and insurance obligations, under various     benefit plans.     Repurchase Agreements    The Company engages in dollar repurchase agreements with mortgage-backed securities ("dollar rolls") and repurchase agreements with other collateral types to increase its return on investments and improve liquidity.  Such arrangements typically meet the requirements to be accounted for as financing arrangements.  The Company enters into dollar roll transactions by selling existing mortgage-backed securities and concurrently entering into an agreement to repurchase similar securities within a short time frame in the future at a lower price. Under repurchase agreements, the Company borrows cash from a counterparty at an agreed upon interest rate for an agreed upon time frame and pledges collateral in the form of securities. At the end of the agreement, the counterparty returns the collateral to the Company and the Company, in turn, repays the loan amount along with the additional agreed upon interest.  Company policy requires that at all times during the term of the dollar roll and repurchase agreements that cash or other collateral types obtained is sufficient to allow the Company to fund substantially all of the cost of purchasing replacement                                          113 

--------------------------------------------------------------------------------    assets. Cash collateral received is invested in short-term investments, with the offsetting collateral liability included as a liability on the Balance Sheets. At December 31, 2011 and 2010, the Company did not have any securities pledged in dollar rolls and repurchase agreement transactions. At December 31, 2011 and 2010, the Company did not have any repurchase obligation.    The Company also enters into reverse repurchase agreements.  These transactions involve a purchase of securities and an agreement to sell substantially the same securities as those purchased.  Company policy requires that, at all times during the term of the reverse repurchase agreements, cash or other collateral types provided is sufficient to allow the counterparty to fund substantially all of the cost of purchasing replacement assets.  At December 31, 2011 and 2010, the Company did not have any securities pledged under reverse repurchase agreements.    The primary risk associated with short-term collateralized borrowings is that the counterparty will be unable to perform under the terms of the contract. The Company's exposure is limited to the excess of the net replacement cost of the securities over the value of the short-term investments.  The Company believes the counterparties to the dollar rolls, repurchase, and reverse repurchase agreements are financially responsible and that the counterparty risk is minimal.    Securities Lending    The Company engages in securities lending whereby certain securities from its portfolio are loaned to other institutions for short periods of time.  Initial collateral, primarily cash, is required at a rate of 102% of the market value of the loaned domestic securities.  The collateral is deposited by the borrower with a lending agent, and retained and invested by the lending agent according to the Company's guidelines to generate additional income.  The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the market value of the loaned securities fluctuates. At December 31, 2011 and 2010, the fair value of loaned securities was $233.0 and $139.7, respectively, and is included in Securities pledged on the Balance Sheets. Collateral associated with securities lending is included in Short-term investments under securities loan agreement, including collateral delivered, and the corresponding liabilities are included in Payables under securities loan agreement, including collateral held, on the Balance Sheets.    

Statutory Capital and Risk-Based Capital

    The Company's primary regulator, the State of Iowa Insurance Division (the "Division") recognizes only statutory accounting practices prescribed or permitted by the State of Iowa for determining and reporting the financial condition and results of operations of an insurance company and for determining its solvency under the Iowa Insurance Law.  The National Association of Insurance Commissioners' ("NAIC") Accounting Practices and Procedures Manual has been adopted as a component of prescribed or permitted practices by the State of Iowa.   

The December 2011 variable annuity assumption changes undertaken by the Company resulted in an increase in gross statutory reserves with respect to variable

                                          114  --------------------------------------------------------------------------------    annuity guaranteed living benefits which are ceded to SLDI under an automatic reinsurance agreement between the Company and SLDI.  See "Reinsurance Agreements" included in Liquidity and Capital Resources in this Part II, Item 7.  SLDI's increased credit for reinsurance obligations with respect to the increase in ceded statutory reserves is supported in part by a $1.5 billion unconditional and irrevocable letter of credit issued by ING Bank N.V. on December 31, 2011, which matures on December 31, 2031. The letter of credit was issued pursuant to a Contingent Capital Letter of Credit Facility Agreement between ING Bank and SLDI and is not confirmed by a qualifying US financial institution recognized by the NAIC SVO ("unconfirmed").  The Division allowed the Company to accept the unconfirmed letter of credit and take reserve credit for the letter of credit with respect to the variable annuity guaranteed living benefits ceded under the reinsurance agreement between the Company and SLDI and is not a permitted practice.    During the period from December 31, 2008 through July 1, 2010, due to the reduction in liquidity and the limited availability of Letter of Credit US confirming banks, the Division also allowed the Company to accept and take statutory reserve credit for unconfirmed letters of credit issued by ING Bank N.V. in amounts up to $320.0 with respect to the variable annuity guaranteed living benefits ceded under the reinsurance agreement between the Company and SLDI.  Approval of the Company's reserve credit related to unconfirmed letters of credit was undertaken by the Division pursuant to authority granted under Iowa's credit for reinsurance regulation and was not a permitted practice.    Effective December 31, 2009, the Company adopted Actuarial Guideline 43 - Variable Annuity Commissioners Annuity Reserve Valuation Method ("AG43") for its statutory basis of accounting.  Where the application of AG43 produces higher reserves than the Company had otherwise established under previous standards, the Company may request permission from the Division to grade-in the impact of higher reserve over a three year period.  During 2009, the Company elected this grade-in provision, as allowed under AG43 and as approved by the Division. The impact of the grade-in for the year ended December 31, 2009 was an increase in reserves and a corresponding decrease in statutory surplus of $79.2. Since the AG43 reserves as of December 31, 2010 were lower than reserves established under previous standards, the Company did not elect the grade in provision. The full impact of adopting AG43 as of December 31, 2010 was an increase in reserves of $24.9.    Effective December 31, 2009, the Company adopted SSAP No. 10R, Income Taxes, for its statutory basis of accounting.  This statement requires the Company to calculate admitted deferred tax assets based upon what is expected to reverse within one year with a cap on the admitted portion of the deferred tax asset of 10% of capital and surplus for its most recently filed statement.  If the Company's risk-based capital ("RBC") levels, after reflecting the above limitation, exceeds 250% of the authorized control level, the statement increases the limitation on admitted deferred tax assets from what is expected to reverse in one year to what is expected to reverse over the next three years and increases the cap on the admitted portion of the deferred tax asset from 10% of capital and surplus for its most recently filed statement to 15%.  Other revisions in the statement include requiring the Company to reduce the gross deferred tax asset by a statutory valuation allowance adjustment if, based on the weight of                                          115 

--------------------------------------------------------------------------------    available evidence, it is more likely than not (a likelihood of more than 50%) that some portion of or all of the gross deferred tax assets will not be realized.  To temper this positive RBC impact, and as a temporary measure at December 31, 2009 only, a 5% pre-tax RBC charge was required to be applied to the additional admitted deferred tax assets generated by  SSAP 10R.  The adoption for 2009 had a December 31, 2009 sunset; however, during 2010, the 2009 adoption, including the 5% pre-tax RBC charge, was extended through December 31, 2011. The effects on the Company's statutory financial statements of adopting this change in accounting principle were increases to total assets and capital and surplus of $86.5 and $70.4 as of December 31, 2011 and 2010, respectively. This adoption had no impact on total liabilities or net income.    The NAIC RBC requirements require insurance companies to calculate and report information under a RBC formula. These requirements are intended to allow insurance regulators to monitor the capitalization of insurance companies based upon the type and mixture of risks inherent in a company's operations. The formula includes components for asset risk, liability risk, interest rate exposure, and other factors. The Company has complied with the NAIC's RBC reporting requirements. Amounts reported indicate that, as of December 31, 2011, the Company has total adjusted capital above all required capital levels.    The sensitivity of the Company's statutory reserves and surplus established for variable annuity contracts and guaranteed benefit riders to changes in the equity markets will vary depending on the magnitude of the decline. The sensitivity will be affected by the level of account values relative to the level of guaranteed amounts, product design and reinsurance. Statutory reserves for variable annuities depend upon the cumulative equity market impacts on the business in force and therefore result in non-linear relationships with respect to the level of equity market performance within any reporting period.    Risk-based capital is also affected by the product mix of the in force book of business (i.e., the amount of business without guarantees is not subject to the same level of reserves as the business with guarantees). Risk-based capital is an important factor in the determination of the credit and financial strength ratings of the Company. Declines in the market value of the Company's separate account assets can increase the reserves for certain guaranteed benefits, even though the Company reinsures many of its guaranteed living benefits. Future declines in the market values of the Company's separate account assets could cause future reductions in the Company's surplus, which may also impact RBC.    Further, the Company's statutory credit for reinsurance taken under the reinsurance agreement with SLDI covering the Company's guaranteed living benefits is subject to uncertainty arising from the offshore reinsurer's ability to provide letters of credit from lending banks under adverse market conditions.  The Company is taking various steps to develop alternative sources of credit for reinsurance collateral.    

The Iowa Insurance Division recognizes as capital and surplus those amounts determined in conformity with statutory accounting practices prescribed or permitted

                                          116  --------------------------------------------------------------------------------

by the Division. Statutory capital and surplus of the Company was $2.2 billion$1.7 billion as of December 31, 2011 and 2010, respectively.

See also Item 7. "Liquidity and Capital Resources - Reinsurance Agreements and Minimum Guarantees," contained herein.

   Income Taxes    Income tax obligations include the allowance on uncertain tax benefits related to Internal Revenue Service ("IRS") tax audits and state tax exams that have not been completed.  The timing of the payment of the remaining allowance of $2.7 cannot be reliably estimated.    Recent Initiatives    On April 9, 2009, the Company's ultimate parent, ING, announced a global business strategy which identified certain core and non-core businesses and geographies, stated ING's intention to explore divestiture of non-core businesses over time, withdraw from certain non-core geographies, limit future acquisitions and implement enterprise-wide expense reductions.  In particular, with respect to ING's U.S. insurance operations, ING is seeking to further reduce its risk by focusing on individual life products, retirement services and a new suite of simpler, lower risk annuity products to be sold by ING USA's affiliate, ING Life Insurance and Annuity Company.  As part of this strategy, ING USA ceased new sales of variable annuity products in March of 2010. Some new amounts will continue to be deposited on ING USA variable annuities as add-on premiums to existing contracts.    On October 26, 2009, ING announced the key components of the final Restructuring Plan ING submitted to the EC as part of the process to receive EC approval for the state aid granted to ING by the State of the Netherlands (the "Dutch State") in the form of EUR 10 billion Core Tier 1 securities issued on November 12, 2008 and the full credit risk transfer to the Dutch State of 80% of ING's Alt-A RMBS on March 31, 2009 (the "ING-Dutch State Transaction"). As part of the Restructuring Plan, ING has agreed to separate its banking and insurance businesses by 2013. ING intends to achieve this separation by divestment of its insurance and investment management operations, including the Company. ING has announced that it will explore all options for implementing the separation including one or more initial public offerings, sales or combinations thereof.    In January 2010, ING lodged an appeal with the General Court of the European Union against specific elements of the EC's decision regarding ING's restructuring plan. In its appeal, ING contests the way the EC has calculated the amount of state aid ING received and the disproportionality of the price leadership restrictions specifically and the disporportionality of restructuring requirements in general. In July 2011, the appeal case was heard orally by the General Court of the European Union. By judgment of March 2, 2012, the Court partially annulled the EC's decision of November 18, 2009, as a result of which a new decision has to be taken by the EC. Interested parties can file an appeal against the General Court's judgment before the                                          117  --------------------------------------------------------------------------------

Court of Justice of the European Union within two months and ten days after the date of the General Court's judgment.

    On November 10, 2010, ING announced that, in connection with the Restructuring Plan, while the option of implementing the separation through one global IPO remains open, it will prepare for a base case of an IPO of this Company and its U.S.-based insurance and investment management affiliates. Preparation for this potential IPO will also require its management to prepare consolidated U.S. GAAP financial statements which would likely include the Company and other affiliates.  As part of this initiative, management has been assessing and will continue to assess its U.S. GAAP accounting policies, including consideration of a fair value accounting model for GMWB contracts with lifetime guarantees.    In 2011, the Company initiated pre-clearance discussions with the Securities and Exchange Commission (SEC) regarding accounting for GMWBL riders as embedded derivatives at fair value under ASC 815. In December 2011, such discussions were concluded with the determination that fair value accounting is a preferable interpretation of the accounting literature. The Company is finalizing its fair value calculations of GMWBL and the other related impacts. As such, effective January 1, 2012, the Company expects to adopt fair value accounting for the GMWBL riders as a retrospective change in accounting principle. The cumulative effect of this change as of January 1, 2012, is currently estimated to decrease Retained earnings and other comprehensive income by approximately $170.0 and $290.0, respectively. The above amounts are net of other related impacts of DAC and other intangible assets, reinsurance and taxes.    The Company expects to adopt a retrospective change in accounting principle for actuarial gains/losses related to its pension and post-retirement benefit plans effective January 1, 2012, to fully recognize such amounts through the Statements of Operations in the year in which they occur, on the basis that the new accounting principle is preferable to the corridor method and represents an improvement in financial reporting. As such, the Company expects to record a cumulative effect of this accounting change, as of January 1, 2012, which reduces Retained earnings by approximately $3.0, net of tax, with a corresponding increase to Other comprehensive income.    The Company completed its annual review of actuarial assumptions for its variable annuity block of business in the fourth quarter of 2011, and updated the assumptions used in determining the future policy benefit reserves for its variable annuity products. The assumptions for its variable annuity block were updated for lapses, mortality, annuitization and utilization rates, with the most significant revision coming from the adjustment of lapse assumptions.  The assumption changes resulted in an increase in gross reserves as of December 31, 2011 of approximately $338.0, a portion of which is covered under various reinsurance agreements with SLDI or other third party reinsurers.  As of December 31, 2011, the increase in reserves, net of reinsurance, was $18.3. 

For

a description of reinsurance covering the Company's variable annuity guaranteed death and living benefits, see the "Minimum Guarantees" section included in Liquidity and Capital Resources in this Part II, Item 7.

    Beginning in the first quarter of 2011, the Company implemented a reversion to the mean technique of estimating its short-term equity market return assumptions. This change in estimate was applied prospectively in first quarter 2011. The reversion to the mean technique is a common industry practice in which DAC and VOBA                                          118 

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unlocking for short-term equity returns only occurs if equity market performance falls outside established parameters.

    In 2009, the Company took certain actions to reduce its exposure to interest rate and market risks.  These actions included revisions to variable annuity guaranteed benefits for new business, reducing the minimum guaranteed interest rate on new fixed indexed annuities business, changes to certain products, reassessment of the investment strategy, hedging certain funds which previously were not hedged, hedging certain guaranteed death benefits which were previously not hedged, hedging interest rate risk on new variable annuity business and hedging the majority of the Company's foreign currency risk.  ING USA continues to monitor these initiatives and their financial impacts. In addition, during 2010, the Company approved a funding capital hedging program.    During December 2010, the Company entered into a series of interest rate swaps with external counterparties.  The Company also entered into a short-term mirror total return swap ("TRS") transaction with ING V, its indirect parent company. The outstanding market value of the TRS was $11.6 at December 31, 2010.  The TRS matured January 3, 2011.    Volatile capital market conditions commencing in the fourth quarter of 2008 and continuing into 2009, coupled with numerous changes in regulatory and accounting requirements and changes in policyholder behavior as a result of the recent changed economic environment, presented extraordinary challenges to actuarial reserve valuation methodologies and controls. Since the second quarter of 2009, ING USA has undertaken a review and strengthening of its systems, processes and internal controls, including those with respect to actuarial calculations on fixed and variable annuity products. As part of its internal controls review, ING USA has from time to time identified control issues that require corrective action and has taken, and will continue to undertake appropriate corrective action to address identified control issues.    

Impact of New Accounting Pronouncements

For information regarding the impact of new accounting pronouncements, refer to Note 1 to the Financial Statements, Business, Basis of Presentation and Significant Accounting Policies, in Part II, Item 8., herein.

   Recently Enacted Legislation    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). The Dodd-Frank Act directs existing and newly-created government agencies and bodies to promulgate regulations implementing the law, a process that is underway and is expected to continue over the next few years.  While some studies have already been completed and the rulemaking process has begun, there continues to be significant uncertainty regarding the results of ongoing studies and the ultimate requirements of regulations that have not yet been adopted.  Until such studies and rulemaking are completed, the precise impact of the Dodd-Frank Act on ING and its affiliates, including the                                          119  --------------------------------------------------------------------------------

Company cannot be determined. However, there are major elements of the legislation that the Company has identified to date that are of particular significance to ING and/or its affiliates, including the Company, as described below.

    The Dodd-Frank Act creates a new agency, the Financial Stability Oversight Council ("FSOC"), an inter-agency body that is responsible for monitoring the activities of the U.S. financial system and recommending a framework for substantially increased regulation of significant financial services firms, including large, interconnected bank holding companies and systemically important nonbank financial companies that could consist of securities firms, insurance companies and other providers of financial services, including non-U.S. companies. A company determined to be systemically significant (a "Systemically Significant Company") will be supervised by the Federal Reserve Board and will be subject to unspecified heightened prudential standards, potentially including minimum capital requirements, liquidity standards, short-term debt limits, credit exposure requirements, management interlock prohibitions, maintenance of resolution plans, stress testing, additional fees and assessments and restrictions on proprietary trading. If, however, ING or the Company were so designated, failure to meet the requisite measures of financial condition could result in requirements for a capital restoration plan or capital raising; management changes; asset sales; and limitations and restrictions on capital distributions, acquisitions, affiliate transactions and/or product offerings. The FSOC is still in the process of determining the criteria it will use to identify non-bank financial companies that will be designated as subject to regulation by the Federal Reserve Board, and it is not possible to predict whether ING or the Company or any of their assets or businesses will be subject to this designation.    Although existing state insurance regulators will remain the primary regulators of the Company and its U.S. insurance company affiliates, the legislation also creates a Federal Insurance Office to be housed within the Treasury Department, which will be charged with monitoring (but not regulating) the insurance industry, including gathering information to identify issues or gaps in the regulation of insurers that could contribute to systemic crisis in the insurance industry or U.S. financial system; preparing annual reports to Congress on the insurance industry; conducting studies on modernization of U.S. insurance regulation and the global reinsurance market; and entering into/implementing agreements with foreign governments relating to the recognition of prudential measures with respect to insurance and reinsurance ("International Agreements"), including the authority to preempt U.S. state law if it is found to be inconsistent with an International Agreement and treats a non-U.S. insurer less favorably than a U.S. insurer.    The legislation creates a new framework for regulating over-the-counter ("OTC") derivatives, which may increase the costs of hedging and other permitted derivatives trading activity undertaken by the Company.  Under the new regulatory regime and subject to certain exceptions, OTC derivatives will be cleared through a centralized clearinghouse and executed on a centralized exchange.  It establishes new regulatory authority for the SEC and the Commodity Futures Trading Commission ("CFTC") over derivatives, and "swap dealers" and "major swap participants", as to be defined by SEC and CFTC regulation, each of whom will be subject to as yet unspecified capital and margin requirements. Based on proposed rules jointly developed by the                                          120  --------------------------------------------------------------------------------    CFTC and the SEC and published on December 1, 2010, which further define the terms "swap dealer," "security-based swap dealer," "major swap participant," and "major security-based swap participant," the Company does not believe it should be considered a "swap dealer," "security-based swap dealer," "major swap participant," or "major security-based swap participant."  However, the final regulations could provide otherwise, which could substantially increase the amount of regulatory requirements for the Company and the cost of hedging and other permitted derivatives trading activity undertaken by the Company.    The Dodd-Frank Act imposes various ex-post assessments on certain financial companies, which may include the Company, to provide funds necessary to repay any borrowings and to cover the costs of any special resolution of a financial company under the new resolution authority established under the legislation (although assessments already imposed under state insurance guaranty funds will be taken into account in calculating such assessments).    The Company will continue to monitor and assess the potential effects of the Dodd-Frank Act as regulatory requirements are finalized and mandated studies are conducted.   

Legislative and Regulatory Initiatives

    Legislative proposals, which have been or may again be considered by Congress, include changing the taxation of annuity benefits, changing the tax treatment of insurance products relative to other financial products, and changing life insurance company taxation.  Some of these proposals, if enacted, either on their own or as part of an omnibus deficit reduction package, could have a material adverse effect on life insurance, annuity, and other retirement savings product sales, while others could have a material beneficial effect. Administrative budget proposals to disallow insurance companies a portion of the dividends received deduction in connection with variable product separate accounts could increase the cost of such products to policyholders.    The SEC proposed in the third quarter of 2010, rescinding Rule 12b-1 under the Investment Company Act of 1940 and adopting a new Rule 12b-2.  If adopted, the proposal would impose new limitations on the level of distribution-related charges that could be paid by mutual funds, including funds available under the Company's variable annuity products.    In connection with the March 31, 2009 transfer by ING of an economic interest in 80% of its Alt-A RMBS portfolio to the Dutch State, the EC had a nine month period to review and assess the competitive impact of the transaction.  On October 26, 2009, ING announced the key components of the final Restructuring Plan ING submitted to the EC as part of the process to receive EC approval for the state aid granted to ING by the Dutch State in the form of EUR 10 billion Core Tier 1 securities issued on November 12, 2008 and the ING-Dutch State Transaction. As part of the Restructuring Plan, ING has agreed to separate its banking and insurance businesses by 2013. ING intends to achieve this separation by the divestment of all insurance and investment management operations, including the Company. In November 2009,                                          121  --------------------------------------------------------------------------------    the Restructuring Plan received formal EC approval and the separation of insurance and banking operations and other components of the Restructuring Plan were approved by ING shareholders.  In January 2010, ING lodged an appeal with the General Court of the European Union against specific elements of the EC's decision regarding ING's restructuring plan. In its appeal, ING contests the way the EC has calculated the amount of state aid ING received and the disproportionality of the price leadership restrictions specifically and the disporportionality of restructuring requirements in general. In July 2011, the appeal case was heard orally by the General Court of the European Union. By judgment of March 2, 2012, the Court partially annulled the EC's decision of November 18, 2009, as a result of which a new decision has to be taken by the EC. Interested parties can file an appeal against the General Court's judgment before the Court of Justice of the European Union within two months and ten days after the date of the General Court's judgment.    Contingencies   

For a discussion regarding contingencies related to the Company's legal proceedings, see Item 3, "Legal Proceedings."

For further information on other contingencies, see Business, Basis of Presentation and Significant Accounting Policies note and Commitments and Contingent Liabilities note to the Financial Statements included in Part II, Item 8., herein.

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